Chapter Nine

Corporate
Strategy:
Horizontal
Integration,
Vertical
Integration,
and Strategic
Outsourcing
 Corporate-Level Strategy
Corporate strategy establishes an overall game plan for
managing a set of businesses in a diversified, multibusiness
company.

Corporate strategy addresses the questions of

✔ What businesses or industries that the company should

compete in,
✔ What businesses to hold or divest,
✔ Which new markets to enter, and
✔ How to best enter new markets (by acquisition, creation
of a strategic alliance, or through internal development,
for example).

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 Corporate-Level Strategy
Corporate-Level Strategy should allow a company, or its
business units, to perform the value-creation functions at lower cost
or in a way that allows for differentiation and premium price.

Companies must adopt a long-term perspective

Consider how changes in the industry and its products,
technology, customers, and competitors will affect its
current business model and future strategies.

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 Corporate-level Strategy and
Multibusiness Model
❖ When a company wants to expand its
business operations, it can do so either in
the same industry or beyond the industry.

❖ The chapter will look at

✔ the advantages of staying in one industry by
pursuing horizontal integration.
✔ Why companies use vertical integration and
expand into new industry.
✔ Why many companies use strategic
outsourcing.
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 The Core Concepts

❖ 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 company’s 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 is the process of acquiring or merging
with industry competitors in an effort to achieve the
competitive advantages.
Staying inside a single industry
allows a company to:
❖ Focusing on its resources
Its total managerial, technological,
financial and functional resources
and capabilities are devoted to
competing successfully in one area.
❖ ‘Sticking to its knitting’
Company stays focused on what it does best,
rather than entering new industries where its
existing resources and capabilities add little value.
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 Two Forms of Horizontal
Integration
❖ Acquisition
When a company uses its capital resources to
purchase another company.
For example, HP acquired Compaq. Google acquired Android.

❖ Merger
An agreement between two companies to pool
their resources and operations and join together
to better compete in a business or industry.
For example, Boeing merged with McDonnell
Douglas to create the world’s largest aerospace
company (Boeing). Heinz and Kraft merged into Kraft Heinz.
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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 (KPMG)
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 (Federal Trade Commission)
• Create too much industry consolidation
• Have the potential for future abuse of market power
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 Vertical Integration
Entering New Industries
A company may expand its operations backward into
industries that produces inputs to its products or forward
into industries that utilize, distribute or sell it products.
❖ Backward Vertical Integration
• Company expands its operations into an industry
that produces inputs to the company’s products.
❖ Forward Vertical Integration
• Company expands into an industry that uses,
distributes, or sells the company’s products.
❖ Full Integration
• Company produces all of a particular input
from its own operations.
• Disposes of all of its completed products through its own outlets.
❖ Taper Integration
• 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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 Stages in the Raw Material
to Consumer Value Chain
Figure 9.1

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Raw Material to Consumer Value Chain
in the Personal Computer Industry
Figure 9.2

Raw Hides Crust Shoe

Retail
and Skins Leather Factory

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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 original or core business
or to improve its competitive position:
1. Facilitates investments in efficiency-enhancing
specialized assets
• Allows company to lower the cost structure or
• Better differentiate its products
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
❖ Increasing Cost Structure
• Company-owned suppliers develop a higher cost structure
than those of the independent suppliers

❖ Technology Change
• Vertical integration may lock into old or inefficient technology
• Prevent company from changing to a new technology that
could strengthen the business model

❖ Demand Unpredictability
• Vertical integration can be risky when demand for a
company’s core product is unpredictable.

Vertical integration can weaken business model when:

• Company-owned suppliers lack incentive to reduce costs

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 Alternatives to Vertical Integration:
Cooperative Relationships
❖ Short-term contracts and competitive bidding
• Many companies use short-term contracts that last for a year or less
to establish price and other terms and conditions.
• For this purpose, many companies use a competitive bidding strategy
(Competitive bidding is a common procurement practice that involves
inviting multiple vendors or service providers to submit offers for any
particular material or service)

• May signal a company’s lack of commitment to its supplier

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Alternatives to Vertical Integration:
Cooperative Relationships
❖ Strategic alliances and Long-Term Contracting

Strategic Alliances are long-term agreement between two or

more companies to jointly develop new products or processes
that benefit all companies concerned.
•Enables creation of a stable long-term relationship
•Becomes a substitute for vertical integration
•Avoids the problems of managing a vertically integrated firm

Taiwan Semiconductor Manufacturing Company (TSMC) makes chips for

many companies, such as Nvidia, Apple, and AMD

(risk of holdup and possibility of being cheated)

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 Alternatives to Vertical Integration:
Cooperative Relationships
❖ Building long-term cooperative relationships

There are several strategies to promote success of long-term

cooperative relationships
• Hostage taking – creating a mutual dependency
Each company holds a hostage – the specialized investment the
other has made. (Boeing and Northrop)

• Credible commitments – a believable promise or pledge

GE and IBM, GE supplies semiconductor chips to IBM.

• 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 company’s
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.
❖ Focusing on a fewer number of value-creation
activities
In order to strengthen its business model
❖ Outsourcing noncore or nonstrategic activities
In order to determine if they can be performed more
effectively and efficiently by independent specialized
companies
❖ Virtual Corporation
Describes companies that have pursued extensive
strategic outsourcing
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 Strategic Outsourcing of Primary
Value Creation Functions
Figure 9.4

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 Benefits of Outsourcing
1. Reducing the cost structure
• The specialist company cost is less than what it would cost
to perform the activity internally.
2. Enhanced differentiation
• The quality of the activity performed by the specialist is
greater than if the activity were performed by the company.
3. Focus on the core business
• Distractions are removed.
• The company can focus attention and resources on
activities important for value creation and competitive
advantage.
Strategic outsourcing may be detrimental when:
• Holdup – company becomes too dependent on specialist provider
• Loss of information – company loses important customer contact or
competitive information
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 Thank You……

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