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Discussion Topics to consider (remember, you don’t need to address all of these):

What are the benefits/risks of being more vertically integrated?

How do you utilize the BCG growth-share matrix?  What is it for?

How should you decide how diversified to be?

Why do so many M&As fail?

Why do firms still do M&As if they usually fail.

When firms do alliances with other firms, how should they choose which of the three types is best?

Chapter 8
Corporate Strategy: Vertical Integration and
Diversification
What Is Corporate Strategy?
• Corporate strategy
➢ Quest for competitive advantage when competing in multiple
industries
• Corporate strategy concerns the scope of the firm
➢ Industry value chain
➢ Products and services
➢ Geography
Three Dimensions of Corporate Strategy
• What stages of industry value chain: vertical
integration
• What range of products and services: horizontal
integration or diversification
• Where in the world to compete: global strategy
http://etc.ch/JvD2
What Is Corporate Strategy?
• Compare to Business-level Strategy
➢ How to compete
➢ Where to compete
• Economies of scope
➢ Savings that come from producing more outputs or
providing different services at less cost
❖ Ex: Amazon range of products & services
• Make vs Buy
Firms vs. Markets: Make or Buy
• Should a firm do things in-house (to make)? Or
obtain externally (to buy)?
• If Cin-house < Cmarket, then the firm should vertically integrate (make) ➢ Ex: Microsoft hires programmers to write code in-house rather than contracting out Make or Buy: A "Cut" at Vertical Integration Alternatives of the Make or Buy Continuum • Short-term contacts ➢ Competitive bidding process ➢ Less than one-year term ➢ Lower prices → cost advantages • Strategic alliances ➢ Facilitate investment without administrative costs ❖ Ex: Long-term contacts, equity alliances, joint ventures • Parent – subsidiary relationship ➢ Most integrated alternative ➢ Parent companies have command and control ❖ Ex: GM owns Opel and Vauxhall in Europe Alternatives along the Make or Buy Continuum Vertical Integration along the Industry Value Chain • Vertical integration ➢ Ownership of its inputs, production, & outputs in the value chain • Vertical value chain ➢ Industry-level integration from upstream to downstream • 30 Rock Example of Vertical Integration Backward and Forward Vertical Integration along an Industry Value Chain Types of Vertical Integration • Full vertical integration • Backward vertical integration • Forward vertical integration • Not all industry value chain stages are equally profitable ➢ Porter’s 5-forces (Chapter 3) is useful here. Example: HTC’s Backward and Forward Integration along the Industry Value Chain in the Smartphone Industry Benefits and Risks of Vertical Integration • Benefits of vertical integration ➢ Securing critical supplies ➢ Lowering costs ➢ Improving quality ➢ Facilitating scheduling and planning ➢ Facilitating investments in specialized assets Risks of Vertical Integration • Increasing costs • Reducing quality • Reducing flexibility Benefits and Risks of Vertical Integration Alternatives to Vertical Integration • Taper integration ➢ Backward integrated but also relies on outside market firms for supplies OR ➢ Forward integrated but also relies on outside market firms for some of its distribution • Strategic outsourcing ➢ Moving value chain activities outside the firm's boundaries Decreasing Vertical Integration Through Outsourcing Corporate (Horizontal) Diversification: Expanding Beyond a Single Market Degrees of diversification ➢ Range of products and services a firm should offer ❖ Ex: PepsiCo also owns Lay's & Quaker Oats. Diversification strategies: ➢ Product diversification ❖ Active in several different product categories ➢ Geographic diversification ❖ Active in several different countries ➢ Product – market diversification ❖ Active in a range of both product and countries Refocusing GE: A Future of Clean-Tech and Health Care? GE’s Changing Product Scope Refocusing GE: A Future of Clean-Tech and Health Care? GE’s Changing Geographic Scope Different Types of Diversification Diversification – Performance Relationship Single or Dominant Firms Advantages Disadvantages • Strategic Focus • Expertise in complex markets • Fast response time • Lower administrative costs • Flatter organizational structure • Employee motivation • Uneven cash flows • Cash poor during growth • Cash rich at maturity • Limited growth opportunities • Size? • Risk? Leveraging Core Competencies for Corporate Diversification • Examples: ❖ Walmart – global supply chain ❖ Infosys − high-quality/low-cost IT services ❖ What kinds of Core Competencies can apply to many areas? • What if you’ve gotten off track and need to reorganize your corporation? ❖ Underutilizing your strengths ❖ Doing too much business in your weak areas Corporate Diversification • Restructuring ➢ Process of reorganizing and divesting business units ➢ To refocus a company to leverage its core competencies • Boston Consulting Group growth-share matrix ➢ Dogs ➢ Cash cows ➢ Stars ➢ Question marks BCG Matrix THE Question • Does corporate diversification lead to superior performance? Yes or No? ➢ Are the individual businesses worth more under the corporate umbrella than they would be separately? ❖ Performance12 > Performance1 + Performance2
❖ Value Creation > Cost + Risk
• Some data to help you decide
➢ 70%-90% acquisitions end in divestiture within 5 years
➢ 53% of acquisitions decrease stock price of acquiring firm
➢ 30% of acquisitions do not change stock price of firm
Dysfunctional Diversification
• CEO pay is strongly correlated with company
size (particularly revenues)
• CEO power, prestige, reputation
• CEO personal challenge
• Reduce CEO employment risk
• Hide poor performance
8-29
Exhibit 8.10 Vertical Integration and
Diversification: Sources of Value Creation and Costs
8-30
Fair Oaks Farm Example

Fair Oaks Farm
• What type of Diversification is this?
• What other industries could combine with tourist
or recreational opportunities?
• Think of other industry combinations that you
have seen have success.

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