You are on page 1of 26

CHARLES W. L. HILL / GARETH R.

JONES
Strategic
StrategicManagement
Management

Chapter

An
AnIntegrated
IntegratedApproach
Approach10th
10thed.
ed.

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

2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Prepared by C. Douglas Cloud , Professor Emeritus of Accounting, Pepperdine University

Learning
Learning Objective:
Objective: After
After reading
reading this
this
chapter
chapter you
you should
should be
be able
able to
to discuss
discuss how
how
corporate-level
corporate-level strategy
strategy can
can be
be used
used to
to
strengthen
strengthen aa companys
companys business
business model
model and
and
business-level
business-level strategies.
strategies.
CORPORATE-LEVEL
CORPORATE-LEVEL STRATEGY
STRATEGY
AND
AND THE
THE MULTIBUSINESS
MULTIBUSINESS MODEL
MODEL

Corporate-level strategies drive a companys


business model over time.
It determines which types of business- and
functional-level strategies managers will
choose to maximize long-term profitability.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

CORPORATE-LEVEL
CORPORATE-LEVEL STRATEGY
STRATEGY
AND
AND THE
THE MULTIBUSINESS
MULTIBUSINESS MODEL
MODEL

Only when a company selects the corporatelevel strategy can a company choose the pricing
option that will allow it to maximize profitability.
When a company decides to expand into new
industries, it must construct a business model at
two levels.
1) It must develop a business model and strategy for
each business unit or division in every industry in
which it competes.
2) It must develop a higher-level business-level
model that justifies its entry into these businesses.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-3

Learning
Learning Objective:
Objective: After
After reading
reading this
this
chapter
chapter you
you should
should be
be able
able to
to define
define
horizontal
horizontal integration
integration and
and describe
describe the
the
primary
primary advantages
advantages and
and disadvantages
disadvantages
associated
associated with
with this
this corporate-level
corporate-level
strategy.
strategy.
HORIZONTAL
HORIZONTAL INTEGRATION:
INTEGRATION: SINGLESINGLEINDUSTRY
INDUSTRY CORPORATE
CORPORATE STRATEGY
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.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-4

HORIZONTAL
HORIZONTAL INTEGRATION:
INTEGRATION: SINGLESINGLEINDUSTRY
INDUSTRY CORPORATE
CORPORATE STRATEGY
STRATEGY

A second advantage is that a company sticks


to the knitting, meaning that it stays focused
on what it knows and does best.
Even when a company stays within one
industry, it is easy for strategic managers to
fail to see the changing nature of the industry
because they are focusing only on how to
position current products.
A focus on corporate-level strategy can help
managers anticipate future trends.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-5

HORIZONTAL
HORIZONTAL INTEGRATION:
INTEGRATION: SINGLESINGLEINDUSTRY
INDUSTRY CORPORATE
CORPORATE STRATEGY
STRATEGY

Horizontal integration is the process of


acquiring or merging with industry competitors
to achieve the competitive advantages that
arise from a large size and scope of operation.
An acquisition occurs when one company
uses its capital resources, such as stock, debt,
or cash, to purchase another company.
A merger is an agreement between equals to
pool their operations and create a new entity.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-6

HORIZONTAL
HORIZONTAL INTEGRATION:
INTEGRATION: SINGLESINGLEINDUSTRY
INDUSTRY CORPORATE
CORPORATE STRATEGY
STRATEGY
Benefits
Benefits of
of Horizontal
Horizontal
Integration
Integration

Lower Cost Structure

Horizontal integration can lower a


companys cost structure because it creates
increasing economies of scale.
A company can lower its cost structure
when horizontal integration allows it to
reduce the duplication of resources
between two companies.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-7

HORIZONTAL
HORIZONTAL INTEGRATION:
INTEGRATION: SINGLESINGLEINDUSTRY
INDUSTRY CORPORATE
CORPORATE STRATEGY
STRATEGY
Benefits
Benefits of
of Horizontal
Horizontal
Integration
Integration

Increased Production Differentiation:


By increasing the flow of innovative new
products that a company sales force can
sell to customers at premium prices.
Product bundling involves offering
customers the opportunity to purchase a
range of products at a single combined
price.
(continued)

2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-8

HORIZONTAL
HORIZONTAL INTEGRATION:
INTEGRATION: SINGLESINGLEINDUSTRY
INDUSTRY CORPORATE
CORPORATE STRATEGY
STRATEGY
Benefits
Benefits of
of Horizontal
Horizontal
Integration
Integration

Cross-Selling

Cross-selling is when a company takes


advantage of or leverages its established
relationship with customers by way of
acquiring additional product lines or
categories that it can sell to customers.
Cross-selling provides a total solution and
satisfies all of a customers specific needs.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-9

HORIZONTAL
HORIZONTAL INTEGRATION:
INTEGRATION: SINGLESINGLEINDUSTRY
INDUSTRY CORPORATE
CORPORATE STRATEGY
STRATEGY
Benefits
Benefits of
of Horizontal
Horizontal
Integration
Reduced IndustryIntegration
Rivalry:

Acquiring or merging with a competitor helps to


eliminate excess capacity in an industry, thus
creating a more benign environment in which
prices might stabilizeor increase.
Horizontal integration often makes it easier to
implement tacit price coordination between
rivals.
Increased Bargaining Power
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-10

HORIZONTAL
HORIZONTAL INTEGRATION:
INTEGRATION: SINGLESINGLEINDUSTRY
INDUSTRY CORPORATE
CORPORATE STRATEGY
STRATEGY
Problems
Problems with
with Horizontal
Horizontal
Integration
Integration

Implementing a horizontal integration strategy is


not an easy task for managers.
There are problems associated with merging very
different company cultures.
When the acquisition is a hostile one, there is high
management turnover.
Using horizontal integration to grow, companies
face conflict with the FTC due to antitrust laws.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-11

Learning
Learning Objective:
Objective: After
After reading
reading
this
this chapter
chapter you
you should
should be
be able
able to
to
define
define vertical
vertical integration
integration and
and
describe
describe the
the primary
primary advantages
advantages
and
and disadvantages
disadvantages associated
associated with
with
corporate-level
corporate-level strategy.
strategy.

A company pursuing a strategy of backward


vertical integration expands it operations
backwards into an industry that produces
inputs for the companys products.
If it pursues this strategy forward into an
industry that uses, distributes, or sells the
companys product, it is known as forward
vertical integration.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INCREASING
INCREASING PROFITABILITY
PROFITABILITY
THROUGH
THROUGH VERTICAL
VERTICAL INTEGRATION
INTEGRATION

A specialized asset is one that is designed to


perform a specific task and whose value
significantly reduced in its next-best use.
A company might invest in specialized
assets to lower their cost structure or to
better differentiate their product.
It is often necessary that suppliers invest in
specialized assets to produce the inputs
that a specific company needs.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-13

INCREASING
INCREASING PROFITABILITY
PROFITABILITY
THROUGH
THROUGH VERTICAL
VERTICAL INTEGRATION
INTEGRATION

By entering industries at other stages of the


value-added chain, a company can often
enhance the quality of the products in its core
business and strengthen its differentiation
advantage.
Sometimes important strategic advantages can
be obtained when vertical integration makes it
quicker, easier, and more cost-effective to plan,
coordinate, and improve scheduling of
transferring the product between adjacent
stages of the value-added chain.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-14

THE
THE LIMITS
LIMITS OF
OF VERTICAL
VERTICAL
INTEGRATION
INTEGRATION

When the disadvantages of vertical integration


are so great that vertical integration reduces
profitability, a company is engaged in vertical
disintegration.
What are the disadvantages of vertical
integration?
Vertical integration can raise costs if, over time, a
company makes mistakes.
Company-owned suppliers do not have to compete
with independent, outside suppliers for orders, thus
they have less incentive to look for ways to reduce
operating costs or improve component quality.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

(continued)

9-15

THE
THE LIMITS
LIMITS OF
OF VERTICAL
VERTICAL
INTEGRATION
INTEGRATION
When technology is changing fast, vertical
integration locks a company into an old,
inefficient technology and prevents it from
changing to a new one that would strengthen its
business model.
If the demand for a companys product wildly
fluctuates and is unpredictable, the firm may find
itself burdened with warehouses full of
component parts it no longer needs, which is a
major drain on profitability.
When demand is unpredictable, vertical
integration makes it hard to manage volume
flow.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-16

THE
THE LIMITS
LIMITS OF
OF VERTICAL
VERTICAL
INTEGRATION
INTEGRATION

Vertical integration may weaken when:


1) Bureaucratic costs increase company-owned
suppliers lack the incentive to reduce operating
costs, and
2) Changing technology or uncertain demand
reduces a companys ability to change its
business model to protect its competitive
advantage.

Companies should be as willing to vertically


disintegrate as they are to vertically integrate, to
strengthen their core business model.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-17

Learning
Learning Objective:
Objective: After
After reading
reading this
this
chapter
chapter you
you should
should be
be able
able to
to describe
describe why,
why,
and
and under
under what
what conditions,
conditions, cooperative
cooperative
relationships
relationships such
such as
as strategic
strategic alliances
alliances and
and
outsourcing
outsourcing may
may become
become aa substitute
substitute for
for
vertical
vertical integration.
integration.
ALTERNATIVES
ALTERNATIVES TO
TO VERTICAL
VERTICAL INTEGRATION:
INTEGRATION:
COOPERATIVE
COOPERATIVE RELATIONSHIPS
RELATIONSHIPS

Companies have found that they can realize many


of the benefits associated with vertical integration
by entering into long-term cooperative
relationships with companies in industries along
the value-added chain.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-18

ALTERNATIVES
ALTERNATIVES TO
TO VERTICAL
VERTICAL INTEGRATION:
INTEGRATION:
COOPERATIVE
COOPERATIVE RELATIONSHIPS
RELATIONSHIPS

Strategic alliances are long-term agreements


between two or more companies to jointly develop
new products or processes that benefit all
companies concerned.
Short-Term
Short-Term Contracts
Contracts and
and Competitive
Competitive
Bidding
Bidding

Many companies use short-term contacts that


last for a year or less to establish the price and
conditions under which they will purchase raw
materials or sell their final products to
distributors or retailers.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-19

ALTERNATIVES
ALTERNATIVES TO
TO VERTICAL
VERTICAL INTEGRATION:
INTEGRATION:
COPPERATIVE
COPPERATIVE RELATIONSHIPS
RELATIONSHIPS
Short-Term
Short-Term Contracts
Contracts and
and Competitive
Competitive
Bidding
Bidding

Short-term contracting does not result in the


specialized investments that are required to
realize differentiation and cost advantages
because it signals a companys lack of longterm commitment to its suppliers.

When there is a need for cooperation, the use


of short-term contracts and comprehensive
bidding can be a serious drawback.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-20

ALTERNATIVES
ALTERNATIVES TO
TO VERTICAL
VERTICAL INTEGRATION:
INTEGRATION:
COPPERATIVE
COPPERATIVE RELATIONSHIPS
RELATIONSHIPS
Strategic
Strategic Alliances
Alliances and
and Long-Term
Long-Term
Contracting
Contracting

A strategic alliance becomes a substitute for


vertical integration because it creates a relatively
stable long-term partnership that allows both
companies to obtain the same kinds of benefits
that result from vertical integration.
Component suppliers benefit from strategic
alliances because their business and profitability
grow as companies they supply grow.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-21

ALTERNATIVES
ALTERNATIVES TO
TO VERTICAL
VERTICAL INTEGRATION:
INTEGRATION:
COPPERATIVE
COPPERATIVE RELATIONSHIPS
RELATIONSHIPS
Building
Building Long-Term
Long-Term Cooperative
Cooperative
Relationships
Relationships

There are several strategies companies can


adopt to promote the success of a long-term
cooperative relationship and lessen the chance
that one company will renege on its agreement
and cheat the other.
Hostage taking is essentially a means of
guaranteeing that each partner will keep its
side of the bargain.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

(continued)

9-22

ALTERNATIVES
ALTERNATIVES TO
TO VERTICAL
VERTICAL INTEGRATION:
INTEGRATION:
COPPERATIVE
COPPERATIVE RELATIONSHIPS
RELATIONSHIPS
Building
Building Long-Term
Long-Term Cooperative
Cooperative
Relationships
Relationships

A credible commitment is a believable


commitment or pledge to support the
development of a long-term relationship
between companies.
A company that forms a strategic alliance
with an independent component supplier
runs the risk that its alliance might become
inefficient over time.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

(continued)

9-23

ALTERNATIVES
ALTERNATIVES TO
TO VERTICAL
VERTICAL INTEGRATION:
INTEGRATION:
COPPERATIVE
COPPERATIVE RELATIONSHIPS
RELATIONSHIPS
Building
Building Long-Term
Long-Term Cooperative
Cooperative
Relationships
Relationships

Because long-term contracts are


renegotiated every 3-5 years, the supplier
knows that if it fails to live up to its
commitments, its partner may refuse to
renew the contract.
Many companies use parallel source
policiesthey enter into long-term contracts
with two suppliers for the same component.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-24

STRATEGIC
STRATEGIC OUTSOURCING
OUTSOURCING

Strategic outsourcing is the decision to allow


one or more of a companys value-chain
activities or functions to be performed by
independent specialist companies that focus all
of their skills and knowledge on just one kind of
activity.
It may encompass an entire function or it may be
just one kind of activity that a function performs.
There has been a clear move to outsource
activities that managers regard as noncore.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-25

STRATEGIC
STRATEGIC OUTSOURCING
OUTSOURCING
Benefits
Benefits of
of
Outsourcing
Outsourcing

Outsourcing has several advantages:


It can help the company lower its cost structure.
It can increase product differentiation.
It can help a company focus on the distinctive
competencies that are vital to its profitability.
Risks
Risks of
of Outsourcing
Outsourcing

Outsourcers holdup refers to specialist raising


prices if a firm becomes too dependent.
A company could suffer loss of important information.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9-26