Corporate-Level Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing

CHAPTER 9
CORPORATE-LEVEL STRATEGY: HORIZONTAL

INTEGRATION, VERTICAL INTEGRATION, AND STRATEGIC
OUTSOURCING
LEARNING OBJECTIVES
 Discuss how corporate-level strategy can be used to
strengthen a company’s business model and business-level
strategies
 Define horizontal integration and discuss the primary
advantages and disadvantages associated with this corporate-
level strategy
 Define vertical integration and discuss the primary
advantages and disadvantages associated with this corporate-
level strategy
 Describe cooperative relationships such as strategic alliances
and outsourcing may become a substitute for vertical
integration
2
CORPORATE-LEVEL STRATEGY
AND THE MULTIBUSINESS MODEL
 Corporate-level strategies should be chosen to
promote the success of its business-level
strategies
 Which allows it to achieve a sustainable competitive
advantage, leading to higher profitability
 Corporate level strategy choices:
 Which industry/business should the company compete
in?
 The value creations functions to be performed in the
business/industry chosen !
 How to enter, consolidate, or exit business/industries.
3
HORIZONTAL INTEGRATION: SINGLE
INDUSTRY CORPORATE STRATEGY
 An advantage of staying within one industry is
that it allows a company to focus all of its
managerial, financial, technological, and
functional resources and capabilities on
competing successfully in one area.
9-4
HORIZONTAL INTEGRATION
 Acquiring or merging with industry competitors
to achieve the competitive advantages that arise
from a large size and scope of operations
 Acquisition: Company uses its capital resources
to purchase another company
 Merger: Agreement between two companies to
pool their resources and operations and join
together to better compete in a business or
industry
5
BENEFITS OF HORIZONTAL
INTEGRATION
 Lowers the cost structure
 Increases product differentiation
 Leverages a competitive advantage
 Reduces rivalry within the industry
 Increases bargaining power over suppliers and
buyers
 Enables “cross selling” and “product bundling”
6
PROBLEMS WITH HORIZONTAL
INTEGRATION
 Difficult to implement
 Conflict with the Regulations governing market
power
 Increase in prices
 Abuse of market power
 Crushing potential competitors
7
VERTICAL INTEGRATION
 When a company expands its operations either
backward or forward into an industry
 Backward vertical integration - Produces inputs for the
company’s products
 Forward vertical integration - Uses, distributes, or sells
the company’s products
8
STAGES IN THE RAW-MATERIALS-TO-CUSTOMER
VALUE-ADDED CHAIN
THE RAW-MATERIALS-TO-CUSTOMER VALUE-

ADDED CHAIN IN THE PC INDUSTRY
9
INCREASING PROFITABILITY THROUGH
VERTICAL INTEGRATION
 Vertical integration increases product
differentiation, lowers costs, and reduces
industry competition when it:
 Facilitates investments in efficiency-enhancing
specialized assets
 Protects product quality
 Results in improved scheduling
10
PROBLEMS WITH VERTICAL
INTEGRATION
 Increasing cost structure
 Disadvantages that arise when technology is
changing fast
 Disadvantages that arise when demand is
unpredictable
 Vertical disintegration: When a company decides
to exit industries either forward or backward in
the industry value chain to its core industry to
increase profitability
11
COMPETITIVE BIDDING AND SHORT-
TERM CONTRACTS
 Competitive bidding strategy - Independent
component suppliers compete to be chosen to
supply a particular component
 Short-term contracts - Last for a year or less
 Does not result in specialized investments
 Signals a company’s lack of long-term commitment to
its suppliers
12
STRATEGIC ALLIANCES AND LONG-
TERM CONTRACTING
 Strategic alliances: Long-term agreements
between two or more companies to jointly
develop new products or processes
 Substitute for vertical integration
 Avoids bureaucratic costs
 Component suppliers benefit because their
business and profitability grow as the companies
they supply grow
13
STRATEGIES TO BUILD LONG-TERM
COOPERATIVE RELATIONSHIPS
 Hostage taking: Means of exchanging valuable
resources to guarantee that each partner to an
agreement will keep its side of the bargain
 Credible commitment: Believable promise or
pledge to support the development of a long-
term relationship between companies
 Each company should possess a kind of power to
discipline its partner, if the need arise
14
STRATEGIC OUTSOURCING
 Decision to allow one or more of a company’s
value-chain activities to be performed by
independent, specialist companies
 Virtual corporation: Companies pursued
extensive strategic outsourcing to the extent that
they only perform the central value creation
functions that lead to competitive advantage
15
STRATEGIC OUTSOURCING OF PRIMARY
VALUE CREATION FUNCTIONS
16
BENEFITS OF OUTSOURCING
Lower cost structure
Enhanced differentiation
Focus on the core business
17
RISKS OF OUTSOURCING
 Holdup
 Risk that a company will become too dependent upon
the specialist provider of an outsourced activity
 Increased competition
 Building of an industry-wide resource that lowers the
barriers to entry in that industry
 Loss of information and forfeited learning
opportunities
18

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CHAPTER 9

CORPORATE-LEVEL STRATEGY: HORIZONTAL

THE RAW-MATERIALS-TO-CUSTOMER VALUE-

Lower cost structure

Focus on the core business

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