Theory of Strategic Management With Cases, 8e: Hills, Jones

Theory of Strategic Management with Cases, 8e
Hills, Jones
Chapter Nine
Strategy at the Corporate Level
Copyright Houghton Mifflin Company. All rights reserved.
9|1
Corporate-Level Strategy
Corporate-Level Strategy: How do we sustain competitive advantages in our current business? What new businesses or industries do we wish to enter? Corporate strategy is used to identify: 1. Businesses or industries that the company should compete in 2. Value creation activities that the company should perform in those businesses 3. Methods to enter or leave businesses or industries in order to maximize its long-run profitability Companies must adopt a long-term perspective in formulating a corporate-level strategy.
9|2
Corporate-Level Strategy and the Multibusiness Model

A multibusiness company must construct its business model at two levels:
1. Business models and strategies

for each business unit or division in every industry in which it competes
2. Higher-level multibusiness model

that justifies its entry into different businesses and industries
9|3
Repositioning and Redefining A Companys Business Model

Corporate-level strategies are primarily directed toward improving a companys competitive advantage and profitability in its present business or product line:
Horizontal Integration
The process of acquiring or merging with industry competitors
Vertical Integration
Expanding operations backward into an industry that produces inputs for the company or forward into an industry that distributes the companys products
Strategic Outsourcing
Letting some value creation activities within a business be performed by an independent entity
9|4
Horizontal Integration: Single-Industry Strategy

Horizontal Integration: the process of acquiring or merging with industry competitors in an effort to achieve the competitive advantages that come with large scale and scope.
Staying inside a single industry allows a company to:
Focus resources
Resources devoted to competing successfully in one area
Stick to the knitting

Company stays focused on what it does best
9|5
Benefits of Horizontal Integration

Profits and profitability increase when horizontal integration: 1. Lowers the cost structure
Creates increasing economies of scale Reduces the duplication of resources between two companies
2. Increases product differentiation

Product bundling broader range at single combined price Total solution saving customers time and money Cross-selling leveraging established customer relationships
3. Replicates the business model

In new market segments within same industry
4. Reduces industry rivalry

Eliminate excess capacity in an industry Easier to implement tacit price coordination among rivals
5. Increases bargaining power

Increased market power over suppliers and buyers Gain greater control
9|6
Problems with Horizontal Integration

A wealth of data suggests that the majority of mergers and acquisitions DO NOT create value and that many may actually DESTROY value. Implementing a horizontal integration is not an easy task
Problems associated with merging very different company cultures High management turnover in the acquired company when the acquisition is a hostile one Tendency of managers to overestimate the benefits to be had in the merger Tendency of managers to underestimate the problems involved in merging their operations
The merger may be blocked if merger is perceived to:

Create a dominant competitor Create too much industry consolidation Have the potential for future abuse of market power
9|7
Vertical Integration: Entering New Industries

Backward Vertical Integration Forward Vertical Integration
Company expands its operations into an industry that produces inputs to the companys products
Company expands into an industry that uses, distributes, or sells the companys products Company produces all of a particular input from its own operations Disposes of all of its completed products through its own outlets In addition to company-owned suppliers, the company will also use other suppliers for inputs or independent outlets in addition to company-owned outlets
9|8
Full Integration
Taper Integration
Stages in the Raw-Materials-toCostumer Value-Added Chain

Figure 9.1
9|9
Raw-Materials-to-Costumer Value-Added Chain in the Personal Computer Industry

Figure 9.2
9 | 10
Full and Taper Integration

Figure 9.3
9 | 11
Increasing Profitability Through Vertical Integration

A company pursues vertical integration to strengthen the business model of its core business or to improve its competitive position.
1. Facilitates investments in efficiency-enhancing specialized assets

Lowered cost structure or better differentiation.
2. Enhances or protects product quality

To strengthen its differentiation advantage through either forward or backward integration
3. Results in improved scheduling

Makes it easier and more cost-effective to plan, coordinate, and schedule the transfer of product within the value-added chain Enables a company to respond better to changes in demand
9 | 12
Problems with Vertical Integration

Increased Cost Structure
Company-owned suppliers develop a higher cost structure than those of the independent suppliers Bureaucratic costs of solving transaction difficulties
Fast-changing Technology
Vertical integration may lock into old or inefficient technology Prevent company from changing to a new technology that could strengthen the business model
Unpredictable Demand Creates risk in vertical integration investments
Vertical integration can weaken a business model when:

Company-owned suppliers lack incentive to reduce costs Changing demand or technology reduces ability to be competitive
9 | 13
Alternatives to Vertical Integration: Cooperative Relationships

Short-term contracts and competitive bidding
May signal a companys lack of commitment to its supplier
Strategic alliances and long-term contracting

Enables creation of a stable long-term relationship Becomes a substitute for vertical integration Avoids the problems of having to manage a company located in an adjacent industry
Building long-term cooperative relationships

Hostage taking creating a mutual dependency Credible commitments a believable promise or pledge Maintaining market discipline power to discipline supplier
Periodic contract renegotiation Parallel sourcing policy
9 | 14
Strategic Outsourcing
Strategic Outsourcing allows one or more of a companys value-chain activities or functions to be performed by independent specialized companies that focus all their skills and knowledge on just one kind of activity.
Company is choosing to focus on a fewer number of value-creation activities
In order to strengthen its business model
Companies typically focus on noncore or nonstrategic activities

In order to determine if they can be performed more effectively and efficiently by independent specialized companies Describes companies that have pursued extensive strategic outsourcing
9 | 15
Virtual Corporation
Strategic Outsourcing of Primary Value Creation Functions

Figure 9.4
9 | 16
Benefits of Outsourcing
1. Lower cost structure
The specialist company cost is less than what it would cost to perform the activity internally The quality of the activity performed by the specialist is greater than if the activity were performed by the company Distractions are removed The company can focus attention and resources on activities important for value creation and competitive advantage
2. Enhanced differentiation
3. Focus on the core business

Strategic outsourcing may be detrimental when there is:

Holdup company becomes too dependent on specialist provider Loss of information company loses important customer contact or competitive information
9 | 17

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Theory of Strategic Management with Cases, 8e

Copyright Houghton Mifflin Company. All rights reserved.

Corporate-Level Strategy and the Multibusiness Model

1. Business models and strategies

2. Higher-level multibusiness model

Copyright Houghton Mifflin Company. All rights reserved.

Repositioning and Redefining A Companys Business Model

Horizontal Integration: Single-Industry Strategy

Staying inside a single industry allows a company to:

Stick to the knitting

Benefits of Horizontal Integration

2. Increases product differentiation

3. Replicates the business model

4. Reduces industry rivalry

5. Increases bargaining power

Problems with Horizontal Integration

The merger may be blocked if merger is perceived to:

Vertical Integration: Entering New Industries

Copyright Houghton Mifflin Company. All rights reserved.

Stages in the Raw-Materials-toCostumer Value-Added Chain

Copyright Houghton Mifflin Company. All rights reserved.

Raw-Materials-to-Costumer Value-Added Chain in the Personal Computer Industry

Copyright Houghton Mifflin Company. All rights reserved.

Full and Taper Integration

Copyright Houghton Mifflin Company. All rights reserved.

Increasing Profitability Through Vertical Integration

1. Facilitates investments in efficiency-enhancing specialized assets

2. Enhances or protects product quality

3. Results in improved scheduling

Problems with Vertical Integration

Unpredictable Demand Creates risk in vertical integration investments

Vertical integration can weaken a business model when:

Copyright Houghton Mifflin Company. All rights reserved.

Alternatives to Vertical Integration: Cooperative Relationships

Strategic alliances and long-term contracting

Building long-term cooperative relationships

Copyright Houghton Mifflin Company. All rights reserved.

Company is choosing to focus on a fewer number of value-creation activities

In order to strengthen its business model

Companies typically focus on noncore or nonstrategic activities

Strategic Outsourcing of Primary Value Creation Functions

Copyright Houghton Mifflin Company. All rights reserved.

3. Focus on the core business

Strategic outsourcing may be detrimental when there is:

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