Chapter 09

CORPORATE STRATEGY: HORIZONTAL & VERTICAL INTEGRATION, STRATEGIC

OUTSOURCING

BUSINESS 189SPRING 2007

DR. MARK FRUIN

CORPORATE STRATEGY• NOT BUSINESS LINE STRATEGY or

PRODUCTS/PLATFORMS/MARKETS• CHOICES FIRMS MAKE WHEN PURSUING

MULTI-BUSINESS STRATEGY• CHOICES SHOULD ADD VALUE

– EITHER CREATE MORE VALUE AT LOWER COST– OR ENABLE SUPERIOR DIFFERENTIATION THAT

BRINGS PREMIUM PRICING– BUT GO BEYOND GENERIC STRATEGIES, IF POSSIBLE– GOING BEYOND OFTEN CHARACTERIZED AS

SYNERGY; MORE THAN SUM OF THE PARTS

LOOKING UP OR DOWN?• TRADITIONALLY, THE ARGUMENT HAS

BEEN THE CORPORATE-LEVEL STRATEGY SETS THE CONTEXT FOR BUSINESS-LEVEL STRATEGY

• ALTERNATIVELY, LOOK UPWARD AND SAY THAT BUSINESS-LEVEL STRATEGY SHOULD SET THE CONTEXT FOR CORPORATE-LEVEL STRATEGY

• WHICH IS RIGHT IN YOUR OPINION?

FROM THE RBV PERSPECTIVE• IT MAKES SENSE TO SAY THAT

BUSINESS-LEVEL STRATEGIES SET THE CONTEXT FOR CORP-LEVEL STRAT

• BECAUSE ASSET SPECIFICITY AND THE STICKINESS OF RESOURCES MAKE THEM HARD TO LEVERAGE BROADLY

• UNFORTUNATELY, CORP EXECUTIVES OFTEN THINK THAT THEY CAN MOBILIZE RESOURCES EFFECTIVELY– “I can manage anything” point of view– General management as opposed to specific skills

CORPORATE STRATEGY SHOULD• ESTABLISH DISTINCTIVE COMPETENCIES

AND COMPETITIVE ADVANTAGES AT MULTIPLE BUSINESS LEVELS

• TYPOLOGY OF FIRM-TYPES– SINGLE PRODUCT FIRM (>80% OF SALES)– DOMINANT PRODUCT FIRM (>60%)– RELATED PRODUCT FIRM

• RELATED IN TERMS OF TECHNOLOGY• RELATED IN TERMS OF MARKET

– UNRELATED PRODUCT FIRM (conglomerate)• UNRELATED BY DESIGN OR BY TIME?

DIFFERENTIATION VS DIVERSIFICATION

• OFTEN HARD TO DISTINGUISH• FROM THE RBV, DIFFERENTIATION CAN BE

ACCOMPLISHED ON THE BASIS OF EXISTING RESOURCES & CAPABILITIES (ALTHOUGH THEY BE USED IN NEW WAYS)

• DIVERSIFICATION REQUIRES NEW RESOURCES & CAPABILITIES

• AUTO MAKER MOVES INTO AUTO PARTS– DIFFERENTIATION OR DIVERSIFICATION?

DIVERSIFICATION

• MEANS “NOT STICKING TO THE KNITTING”

• HORIZONTAL INTEGRATION VS VERTICAL INTEGRATION:– WHAT’S THE DIFFERENCE?– WHAT’S THE LOGIC?– WHAT’S THE LIKELY OUTCOME?

HORIZONTAL INTEGRATION• MERGER WITH & ACQUISITION OF FIRMS IN THE

SAME INDUSTRY– HOW TO DEFINE INDUSTRY BOUNDARIES– IS IBM GLOBAL SERVICES SAME INDUSTRY AS IBM?

IBM HARDWARE? IBM SOFTWARE?– IS APPLE SAME INDUSTRY AS HP/COMPAQ?

• USUALLY (IN PAST) HORIZONTAL INTEGRATION PRECEDES VERTICAL INTEGRATION - WHY?

• RECENT EXAMPLES: DAIMLER BENZ BUYS CHRYSLER; BOEING BUYS MCDONALD DOUGLAS; HP BUYS COMPAQ– A GOOD THING? HOW ADD VALUE?

HORIZONTAL INTEGRATION• TEXT SAYS ADVANTAGES OF

HORIZONTAL INTEGRATION ARE– REDUCED COSTS– INCREASED VALUE THROUGH

DIFFERENTIATION • PRODUCT BUNDLING• TOTAL SOLUTION SELLING• CROSS SELLING (FINANCIAL SUPERMARKET)• STRATEGIES IN MATURE INDUSTRIES

– MANAGED RIVALRY• ELMINATE EXCESS CAPACITY• PRICE COORDINATION

– INCREASED BARGAINING (MARKET) POWER

HORIZONTAL INTEGRATION PROBLEMS

• PAY TOO MUCH UP-FRONT• REALIZE TOO LITTLE ON BACK END• HARD TO MERGE RESOURCES,

CAPABILITIES & CULTURES OF DIFFERENT FIRMS (EVEN WITHIN SAME INDUSTRY)

• ANTITRUST CONCERNS• RISKS INCREASING OR DECREASING?

– WHAT SORT OF RISK? MKT/ORG/TECH

VERTICAL INTEGRATION• BACKWARD OR UPSTREAM INTEGRATION

MEANS BUYING YOUR OWN INPUTS• DOWNSTREAM OR FORWARD INTEGRATION

MEANS DISPOSING OF ONES’ OUTPUTS• HISTORICALLY, V.I. CAME AFTER H.I. IN THE

UNITED STATES: DUPONT, GM, GE• CURRENT SUPPLY CHAIN STRATEGIES ARE

MOSTLY VERTICAL INTEGRATION STRATEGIES• FULL VERSUS TAPER INTEGRATION

VALUE CHAIN

• THE STAGES OF RESOURCE CONVERSION FROM INPUTS TO OUTPUTS

• VALUE CHAIN IS A CHOICE ABOUT HOW MANY STAGES OF RESOURCE CONVERSION (VERTICAL INTEGRATION) TO DO INTERNALLY

• THE TRADITIONAL LOGIC IS: LESS EXPENSIVE TO DO IT ONESELF– MARKETS VS HIERARCHIES DEBATE– OPPORTUNISM AND BOUNDED RATIONALITY– STABILITY & ACCESS TO MARKETS VARY– IT CAN LOWER COSTS OF HIERARCHY

WHEN DOES IT MAKE SENSE TO VERTICALLY INTEGRATE?

• WHEN “UNIQUE” RESOURCES AVAILABLE– DISTINCTIVE COMPETENCIES MAY BE BASED ON

HAVING THE “RIGHT”, LIMITED RESOURCE/S• WHEN IT IS HARD TO FIND SPECIALIZED ASSETS

NEEDED IN ADJACENT STAGES– RISK OF HOLDUP– RISK OF QUALITY PROBLEMS

• PROTECT/LEVERAGE MARKET POSITION• IMPROVE SCHEDULING/TIME TO MARKET

FULL VS PARTIAL (TAPERED) VERTICAL INTEGRATION

• TAPERED INTEGRATION OCCURS WHEN FIRMS BUY FROM INDEPENDENT SUPPLIERS IN ADDITION TO SELF-SUPPLY

• WHY DO THIS?– SECURE ALTERNATIVE SOURCES OF SUPPLY– COMPARATIVE COST CONTROLS– UNDERSTAND NATURE OF ASSET SPECIFICITY– PROTECT KEY RESOURCES/CAPABILITIES

DISADVANTAGES OF VERTICAL INTEGRATION

• IT’S COSTLY• BEST USE OF FUNDS?• NARROWS RANGE OF CHOICES/SOURCES

AVAILABLE TO FIRM• MAY REDUCE INNOVATION • MAY NOT LEVERAGE RESOURCES

EFFECTIVELY BECAUSE OF– BUREAUCRATISM– LOSS OF MOTIVATION– UNDER- OR OVER-SUPPLY OF INPUTS (DEMAND

MANAGEMENT)

ALTERNATIVES TO VERTICAL BUT NOT HORIZONTAL INTEGR• PARTNERSHIPS

– SHORT-TERM CONTRACTS & COMPETITIVE BIDDING

– JOINT VENTURES– STRATEGIC ALLIANCES

• STRATEGIC OUTSOURCING– RELATIONAL CONTRACTING

• RELATIONSHIP-BASED PRICING/GOODWILL– SUPPLIER MANAGEMENT STRATEGIES– INTERFIRM NETWORK STRATEGIES

• A LA JAPANESE (BUT NOT US) AUTO & ELECTRONICS FIRMS

OUTSOURCING BENEFITS• REDUCE COSTS & CERTAIN RISKS• SPEED OF OPERATIONS• IMPROVED FOCUS• INNOVATION ENHANCED & ACCELERATED• IMPROVE PRODUCT DIFFERENTIATION

– EFFICIENCY– QUALITY– ENHANCED CUSTOMER SATISFACTION– BESIDES FUNCTIONAL STRATS, BETTER LB STRATS:

PRODUCT & MKT DEVELOPMENT, PROLIFERATION, ETC.

OUTSOURCING DRAWBACKS• THINKING PROBLEMS HAVE GONE AWAY• HOLDUP• SCHEDULING & INTEGRATION PROBLEMS

(COORDINATION & TRANSACTION COSTS)• DISPUTE RESOLUTION NOT SIMPLE• LOSS OF INFORMATION & POTENTIAL

PROPRIETARY KNOWHOW• LINKAGE-BASED KNOWHOW OFTEN LOST

(VALUE CHAIN BASED ON LINKED ACTIVITIES)

CL STRAT AS COOPERATION• HORIZONTAL & VERTICAL INTEGRATION

STRATEGIES ARE COOPERATIVE STRATEGIES SECURED BY OWNERSHIP

• NIELSEN PORTER– POOLING SHARING ACTIVITIES– EXCHANGE TRANSFER SKILLS/ FINANCIAL MANAGEMENT– COMPL. SPECIAL- RESTRUCTURING

IZATION– EXPERIMENT & WITHDRAWAL

ALTERNATIVES TO C-L STRATEGIES

• CONGLOMERATE (A KIND OF UNRELATED C-L STRATEGY)

• BUSINESS GROUP (WITH OR WITHOUT HOLDING COMPANY CONTROL)

• CHOOSE “RIGHT” INDUSTRIAL DISTRICTS• STRONG NETWORK• LOOSE NETWORK

COOPERATION SECURED & UNSECURED BY OWNERSHIP

• CL STRATEGIES ARE GENERALLY SECURED BY OWNERSHIP

• NETWORK-BASED STRATEGIES ARE OFTEN NOT SECURED BY OWNERSHIP

• WHY THE DIFFERENCE?– TIMING OF COOPERATION; DOWNSTREAM COOP IS

MORE DIFFICULT THAN UPSTREAM– CATCH-UP OR NOT– SPEED OF COOP ACTIVITIES– ALTERNATIVE SOURCES OF POWER/GOVERNANCE– COMPLEXITY OF INTERACTIVE ROUTINES– IMITATIONOF ACTIONS DOES NOT REQUIRE

DUPLICATION OF MEANS

NETWORK ALTERNATIVES

• TOYOTA GROUP• ABOUT 10% OF 1ST

TIER FIRMS HAVE TOYOTA INVESTM.

• COORDINATE THRU TPS/JIT

• ORGANIZATIONAL PROPERTY RIGHTS

• HIERARCHICAL NETWORK WITH MANY SUB-SYSTEMS

• SUN’S JAVA & JINI• SUN NOT INVEST IN

DEVELOPERS• SUN RETAINS OS

PROPERTY RIGHTS• EVERYTHING ELSE

FAIR GAME• SCALE-FREE

NETWORK WITH LOTS OF SELF-ORGANIZING & REDUNDANCY