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Theory of Strategic Management with Cases, 8e

Hills, Jones

Chapter Nine
Strategy at the Corporate Level

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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.
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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

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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
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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
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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
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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
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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
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Full Integration

Taper Integration

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


Figure 9.1

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


Figure 9.2

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Full and Taper Integration


Figure 9.3

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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
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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

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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

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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
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Virtual Corporation
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Strategic Outsourcing of Primary Value Creation Functions


Figure 9.4

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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
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