Solution Manual for Contemporary Strategy Analysis

10th by Grant

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Solution Manual for Contemporary Strategy Analysis 10th by Grant

Instructors’ Manual to Accompany Contemporary Strategy Analysis (10th edn. Wiley, 2019)

CHAPTER 10. VERTICAL INTEGRATION AND THE

SCOPE OF THE FIRM

Introduction

Chapters 10-14 are concerned with corporate strategy. The number of sessions I devote to
corporate strategy depends upon the length of the course and whether or not there is a
subsequent elective course in corporate strategy.
I introduce corporate strategy by looking first at the boundaries of firms and their historical
trends—concentration on the expanding size and scope of companies for most of the 19 th and
20th centuries, followed by more recent downsizing, refocusing, and outsourcing. I then focus on
vertical integration. I begin with vertical integration rather than multinational expansion, or
diversification mainly because vertical integration is the most direct way of addressing the
determinants of the boundaries of the firm—particularly the role of transaction costs. Cases on
vertically-integrated fast-fashion companies such as Inditex (owner of Zara) and American
Apparel (which went bankrupt in 2016).
My main goals for this session are for students:
• To appreciate the central issue of corporate strategy – the determination of the scope of
the firm.
• To be capable of making vertical integration decisions. In relation to a specific activity,
should the firm make or buy? In relation to the vertical scope of the firm as a whole, how
broad a span of the industry value chain should the firm encompass?

Class Outline

I introduce corporate strategy by considering the boundaries of the firm—covering the material
in the first section of Chapter 11, “Transaction Costs and the Scope of the Firm.” Following the
work of Alfred Chandler (The Visible Hand and Strategy and Structure), I note the expansion in
the size and scope of firms since the middle of the 19th century and ask my students “Why?” The
points that emerge concern technology (the telephone, the computer) and the developments in
management (financial systems, organizational forms, management techniques).

I then address the contracting of the boundaries of larger firms since the mid-1970s and the
trends towards outsourcing and re-focusing on core businesses, again asking my students
“Why?" Explanations include increased uncertainty and turbulence in the business environment
which have increased the costs of coordination within large, complex, hierarchical organizations.

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Also, the development of digital technologies has made the same ICT capabilities available to
small firms and individuals as to large organizations.

This discussion of the relative merits of organizing within large corporations, as compared with
small firms coordinated by markets, provides an easy way into the basic principles of transaction
cost analysis.

I then turn to the analysis of vertical integration. I begin with a case where vertical integration
has been a primary feature of the firm’s strategy (e.g. Zara, American Apparel, Eni, Bird’s Eye,
Comcast).
If, as in textiles and clothing, the industry is vertically de-integrated (i.e. separate firms operate at
each stage of the value chain), I ask why this is so. Typically, the key factors are (a) relatively
efficient competitive markets in which firms contract with one another (with little need for
transaction-specific investments) and (b) differences in the resources and organizational
capabilities required at each vertical stage.
So, why is it that our case study firm (e.g. Zara) has been successful despite rejecting industry
conventions? The key is to recognize the unique features of its strategy and understand that,
despite foregoing the efficiency advantages associated with outsourcing, it has gained particular
competitive advantage through a unique strategy that exploits advantages of close coordination
between multiple vertical stages. Thus, in the case of Zara, extremely short cycle times between
initial product design and delivery to retail stores allows very fast response to emerging fashion
preferences.
The issues arising from the case study discussion then allow a more systematic treatment of the
advantages and disadvantages of vertical integration and the factors that determine their
relative importance (as shown in Figure 10.4 of Contemporary Strategy Analysis).
I finish up by pointing out that vertical integration and “arms-length” market contracts are just
two extremes of a range of vertical relationships—a key feature of supplier relationships today is
the ability to combine the coordination advantages of vertical integration with the flexibility and
specialization advantages of outsourcing.

Cases

Zara: Super-Fast Fashion. (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th
edn., Wiley, 2019).
Amancio Ortego began making low priced, but well-made copies of fashionable garments in his
home town of A Coruña in north-western Spain in the 1960s. He opened his first Zara store in
1974; in 2018, Inditex, Zara’s owner was the world’s biggest apparel company. Zara’s vertically-
integrated system—from its base in the northwest of Spain, it designs, manufacturers which it
distributes fashion garments to its retail stores worldwide—is radically different from the
outsourcing model that dominates the fashion clothing trade. While losing the cost savings of

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outsourcing production to low-wage manufacturers in developing countries, its tightly-integrated
system allows remarkable speed in responding to new fashion trends. A key component of
Zara’s the effectiveness vertically integrated system is the close, personal communications
between store managers, marketing executives, designers, and manufacturing managers. As Zara
grows in size and its sourcing and manufacturing operations become increasingly dispersed, so
complexity, can Zara sustain its combination of speed, efficiency, and stylishness as the simplicity
and directness of Zara’s system risks becoming compromised by complexity.

(See also: Kasra Ferdows, Jose Machuca, and Michael Lewis, “Zara”, ECCH Case No. 603-002-1,
2002)

American Apparel: Vertically Integrated in Downtown L.A. (R. M. Grant, Contemporary Strategy
Analysis: Text and Cases, 9th edn., Wiley, 2016).
In 2015 American Apparel is in crisis: its founder has been fired as CEO and the company has
sought Chapter 11 bankruptcy protection. A key issue for the new CEO is whether to maintain
American Apparel’s vertical integration model or to follow the approach of almost all mass-
market fashion clothing companies: outsource production to low-wage countries. American
Apparel’s business model is based upon designing and manufacturing in downtown Los Angeles
then selling through company-owned retail stores. The case outlines the logic of American
Apparel’s strategy of vertical integration and considers the potential for turnaround.

Birds Eye and the UK Frozen Foods Industry (Available from the Instructor Companion Site to
www.contemporarystrategyanalysis.com).
Birds Eye’s competitive advantage was built on market dominance through its construction of a
vertically integrated chain. The case raises important issues concerning the rationale for vertical
integration over spot transactions or long-term contracts, then analyzes how industry evolution
destroys the advantages of vertical integration. The case examines in some detail the evolution
of industry structure, competition, and the competitive position of the industry leader over the
industry’s life cycle.

Eni SpA: The Corporate Strategy of an International Energy Major (R. M. Grant, Contemporary
Strategy Analysis: Text and Cases, 10th edn., Wiley, 2019).
The Eni case considers the corporate strategy of a vertically-integrated, multinational oil and gas
major at a time when the strategy that has successfully guided it for two decades is threatened
by a combination of problems—the most serious being a collapse in crude oil prices. Eni has
undergone a transformation from an unprofitable, state-owned enterprise to a shareholder-
focused, international energy company. Yet, it is still very different from most other petroleum
majors—in particular it has a large, vertically integrated natural gas business. Yet, this gas
strategy is threatened by political uncertainties in several of its major production sources (Libya,
Egypt, Russia) and the European Union’s policies for increasing competition in the European gas
market. The case addresses issues of “Which businesses should Eni be in?” “How should

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Solution Manual for Contemporary Strategy Analysis 10th by Grant

resources be allocated between them?” and “How should the linkages between them be
managed?”

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