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All rights reserved.,8,*,Click to Edit Master Title Style,Click to edit Master text styles,Second level,Third level,Fourth level, 2013 by The McGraw-Hill Companies, Inc. All rights reserved.,8,*,Click to Edit Master Title Style,Click to edit Master text styles,Second level,Third level,Fourth level, 2013 by The McGraw-Hill Companies, Inc. All rights reserved.,8,*,Click to Edit Master Title Style,Click to edit Master text styles,Second level,Third level,Fourth level, 2013 by The McGraw-Hill Companies, Inc. All rights reserved.,8,*,Click to Edit Master Title Style,Click to edit Master text styles,Second level,Third level,Fourth level, 2013 by The McGraw-Hill Companies, Inc. All rights reserved.,8,*,Corporate Strategy: Vertical Integration and Diversification,Corporate Strategy: Vertical I,Part 2,Strategy Formulation, 2013 by The McGraw-Hill Companies, Inc. All rights reserved.,8-,2,Part 2 Strategy Formulation 2,LO 8-1,Define corporate-level strategy, and describe the three dimensions along which it is assessed.,LO 8-2,Describe and evaluate different options firms have to organize economic activity.,LO 8-3,Describe two types of vertical integration along the industry value chain: backward and forward vertical integration.,LO 8-4,Identify and evaluate benefits and risks of vertical integration.,LO 8-5,Describe and examine alternatives to vertical integration.,LO 8-6,Describe and evaluate different types of corporate diversification.,LO 8-7,Apply the core competence market matrix to derive different diversification strategies.,LO 8-8,Explain when a diversification strategy creates a competitive advantage, and when it does not.,8-,3,LO 8-1Define corporate-level,ChapterCase,8,Refocusing GE: A Future of Clean-Tech,and Health Care?,Jeffrey Immelt appointed CEO of GE Sept. 7,th,2001,Environmental Change (e.g., 9/11 and Global Financial Crises),GEs stock price fell by 84%,Lost AAA credit rating,Refocus on green economy and health care industries,Sold majority stake in NBC Universal to Comcast,ecomagination,: solar energy, hybrid locomotives, fuel cellsetc.,healthymagination,: increase quality and access to health care,8-,4,ChapterCase 8 Refocusing GE: A,ChapterCase,8,Refocusing GE: A Future of Clean-Tech,and Health Care?,GEs Changing,Product,Scope,Source: Authors depiction of data in GE annual reports.,8-,5,ChapterCase 8 Refocusing GE: A,ChapterCase,8,Refocusing GE: A Future of Clean-Tech,and Health Care?,GEs Changing,Geographic,Scope,Source: Authors depiction of data in GE annual reports.,8-,6,ChapterCase 8 Refocusing GE: A,What Is Corporate Strategy?,Corporate strategy,Quest for competitive advantage when competing in multiple industries,Ex: Jeffrey Immelts initiative in clean-tech and health care industries,Corporate strategy concerns the scope of the firm,Industry value chain,Products and services,Geography,8-,7,What Is Corporate Strategy?Cor,What Is Corporate Strategy? (contd),Three dimensions,What stages of industry value chain and degrees of,vertical integration,What range of products and services and degrees of,horizontal integration,and,diversification,Where in the world to compete and,global strategy,8-,8,What Is Corporate Strategy? (c,EXHIBIT 8.1,Three Dimensions of Corporate Strategy,Scope of the firm,determines boundaries along these 3 dimensions.,8-,9,EXHIBIT 8.1Three Dimensions of,What Is Corporate Strategy? (contd),Economies of scale,Average per-unit cost decreases as its output increases,Ex: Anheuser-Busch Inbev largest global brewer,Economies of scope,Savings that come from producing more outputs or providing different services at less cost,Ex: Amazon range of products & services,Transaction cost,The cost associated with economic exchange,Make or buy decision,8-,10,What Is Corporate Strategy? (c,LO 8-1,Define corporate-level strategy, and describe the three dimensions along which it is assessed.,LO 8-2,Describe and evaluate different options firms have to organize economic activity.,LO 8-3,Describe two types of vertical integration along the industry value chain: backward and forward vertical integration.,LO 8-4,Identify and evaluate benefits and risks of vertical integration.,LO 8-5,Describe and examine alternatives to vertical integration.,LO 8-6,Describe and evaluate different types of corporate diversification.,LO 8-7,Apply the core competence market matrix to derive different diversification strategies.,LO 8-8,Explain when a diversification strategy creates a competitive advantage, and when it does not.,8-,11,LO 8-1Define corporate-level,Transaction Cost Economics and Scope of the Firm,Transaction cost economics,Explains and predicts the,scope,of the firm,Market vs. firms have differential costs,Transaction costs,Costs associated with economic exchanges,Either in the firm OR in the markets,Ex: negotiating and enforcing contracts,Administrative costs,Costs pertaining to organizing an exchange within a hierarchy,Ex: recruiting & training employees,8-,12,Transaction Cost Economics and,Firms vs. Markets: Make or Buy,Should a firm do things in-house (to make)? Or obtain externally (to buy)?,If C,in-house, C,market,then the firm should,vertically integrate,Ex: Microsoft hires programmers to write code,in-house rather than contracting out,Firms and markets have distinct advantages and disadvantages (see Exhibit 8.2),8-,13,Firms vs. Markets: Make or Buy,EXHIBIT 8.2,Organizing Economic Activity: Firm vs. Markets,8-,14,EXHIBIT 8.2Organizing Economic,Firms vs. Markets: Make or Buy?,Disadvantage of “make” in-house,Principal agent problem,owner = principal, manager = agent,Agent pursues his/her own interests,Disadvantage of “buy” from markets,Search cost,Opportunism,Incomplete contracting,Enforce legal contracts,Information asymmetries,One party is more informed than others,Akerlof “Lemons problem” for used cars,8-,15,Firms vs. Markets: Make or Buy,Alternatives of the Make or Buy Continuum,Short-term contacts,Competitive bidding process,Less than one-year term,Lower prices, cost advantages,Strategic alliances,Facilitate investment without administrative costs,Ex: Long-term contacts, equity alliances, joint ventures,Parent subsidiary relationship,Most integrated alternative,Parent companies have command and control,Ex: GM owns Opel and Vauxhall in Europe,8-,16,Alternatives of the Make or Bu,EXHIBIT 8.3,Alternatives along the Make or Buy Continuum,8-,17,EXHIBIT 8.3Alternatives along,1,18,STRATEGY HIGHLIGHT 8.1,Toyota Locks Up Lithium for Car Batteries,World demand for lithium-ion batteries for cars,Grow from $278 million in 09 to,$25 billion,in 2014,Toyota wants to secure long-term supply of lithium to power its hybrid fleet,Orocobre holds exploration rights to a large salt-lake area,Upfront investment to extract of lithium is very high,Should Orocobre make the investment to supply Toyota?,To encourage investment, Toyota took an,equity position,8-,18,118STRATEGY HIGHLIGHT 8.1Toyo,LO 8-1,Define corporate-level strategy, and describe the three dimensions along which it is assessed.,LO 8-2,Describe and evaluate different options firms have to organize economic activity.,LO 8-3,Describe two types of vertical integration along the industry value chain: backward and forward vertical integration.,LO 8-4,Identify and evaluate benefits and risks of vertical integration.,LO 8-5,Describe and examine alternatives to vertical integration.,LO 8-6,Describe and evaluate different types of corporate diversification.,LO 8-7,Apply the core competence market matrix to derive different diversification strategies.,LO 8-8,Explain when a diversification strategy creates a competitive advantage, and when it does not.,8-,19,LO 8-1Define corporate-level,Vertical Integration along the Industry Value Chain,In,what stages,of the industry value chain should the firm participate?,Vertical integration,Ownership of its inputs, production, & outputs in the value chain,Horizontal value chain,Internal, firm-level value chains (Chapter 4),Vertical value chain,Industry-level integration from upstream to downstream,Examples: cell phone industry value chain,Many different industries and firms,8-,20,Vertical Integration along the,EXHIBIT 8.4,Backward and Forward Vertical Integration along an Industry Value Chain,8-,21,EXHIBIT 8.4Backward and Forwar,Types of Vertical Integration,Full vertical integration,Ex: Weyerhaeuser,Owns forests, mills, and distribution to retailers,Backward,vertical integration,Ex: HTCs backward integration into design of phones,Forward,vertical integration,Ex: HTCs forward integration into sales & branding,Not all industry value chain stages are,equally,profitable,Zara primarily designs in-house & partners for speedy new fashions delivered to stores,8-,22,Types of Vertical IntegrationF,EXHIBIT 8.5,HTCs Backward and Forward Integration along the Industry Value Chain in the Smartphone Industry,8-,23,EXHIBIT 8.5HTCs Backward and,LO 8-1,Define corporate-level strategy, and describe the three dimensions along which it is assessed.,LO 8-2,Describe and evaluate different options firms have to organize economic activity.,LO 8-3,Describe two types of vertical integration along the industry value chain: backward and forward vertical integration.,LO 8-4,Identify and evaluate benefits and risks of vertical integration.,LO 8-5,Describe and examine alternatives to vertical integration.,LO 8-6,Describe and evaluate different types of corporate diversification.,LO 8-7,Apply the core competence market matrix to derive different diversification strategies.,LO 8-8,Explain when a diversification strategy creates a competitive advantage, and when it does not.,8-,24,LO 8-1Define corporate-level,Benefits and Risks of Vertical Integration,Benefits of vertical integration,Securing critical supplies,Lowering costs,Improving quality,Facilitating scheduling and planning,Facilitating investments in specialized assets,Ex: HTC started as OEM & expanded to fully integrated,8-,25,Benefits and Risks of Vertical,1,26,STRATEGY HIGHLIGHT 8.2,Back to the Future: PepsiCos Forward Integration,PepsiCo acquired bottlers in 2009,Gain control over quality, pricing, distribution, and in-store display.,Reversed a 1999 decision to sell off Pepsi bottlers,Goal now is faster innovative products launched,Forward integration,Enhance flexibility and improve decision making,Cost saving and interdependence,Coca-Cola did the same: forward integration with bottlers,8-,26,126STRATEGY HIGHLIGHT 8.2Back,Benefits of Vertical Integration,Specialized assets,Assets that have significantly,more value,in their,intended,use than in their next best use,Types of specialized assets,Site specificity,Co-located such as mining equipment,Physical asset specificity,Bottling machinery,Human asset specificity,Mastering procedures of a particular organization,8-,27,Benefits of Vertical Integrati,Risks of Vertical Integration,Increasing costs,Internal suppliers lose incentives to compete,Reducing quality,Single captured customer can slow experience effects,Reducing flexibility,Slow to respond to changes in technology or demand,Increasing the potential for legal repercussions,FTC carefully reviewed Pepsi plans to buy bottlers,8-,28,Risks of Vertical IntegrationI,Alternatives to Vertical Integration,Taper integration,Backward integrated but also relies on outside market firms for supplies,OR,Forward integrated but also relies on outside market firms for some of its distribution,Strategic outsourcing,Moving value chain activities outside the firms boundaries,Ex: EDS and PeopleSoft provide HR services to many firms that choose to outsource it.,8-,29,Alternatives to Vertical Integ,EXHIBIT 8.6,Taper Integration along the Industry Value Chain,Outside suppliers could,also be,off-shored,when,they are not located in the,home country,8-,30,EXHIBIT 8.6Taper Integration a,Corporate Diversification: Expanding Beyond a Single Market,Degrees of diversification,Range of products and services a firm should offer,Ex: PepsiCo also owns Lays & Quaker Oats.,Diversification strategies:,Product diversification,Active in several different product categories,Geographic diversification,Active in several different countries,Product market diversification,Active in a range of,both,product and countries,8-,31,Corporate Diversification: Exp,Types of Corporate Diversification,Single business,Google,Dominant business,Microsoft,Related diversification,Related constrained,ExxonMobil,Related linked,Disney,Unrelated diversification,GE,8-,32,Types of Corporate Diversifica,EXHIBIT 8.7,Different Types of Diversification,8-,33,EXHIBIT 8.7Different Types of,Small Group Exercise 1,Agriculture is one of the largest global industries,In the U.S. and many other countries, farmers often struggle to turn a profit given the variances of weather and commodity prices.,Some working farms are turning to,tourism,as an additional and complementary revenue source.,A study from the U.S. Census of Agriculture in 2007 found nearly 25,000 farms providing some level of,agri-tourism and recreation services,.,Small farms worldwide are participating in this trend by offering “pick your own” crops in season as well as a small bed-and-breakfast.,What other industries could benefit from diversifying into tourism & recreation?,8-,34,Small Group Exercise 1Agricult,1,35,STRATEGY HIGHLIGHT 8.3,ExxonMobil Diversifies into Natural Gas,ExxonMobil earned highest profit in its history in 2008,Majority of profits come from petroleum-based products.,Environmental change toward clean energy,ExxonMobil must react to the change.,ExxonMobil to focus on clean energy: natural gas.,ExxonMobil acquired XTO Energy,Leverage core competence in exploration and commercialization of energy sources into natural gas.,85% today fossil fuels,Exxon is largest producer of natural gas on the planet.,Exxon XTO video,8-,35,135STRATEGY HIGHLIGHT 8.3Exxo,LO 8-1,Define corporate-level strategy, and describe the three dimensions along which it is assessed.,LO 8-2,Describe and evaluate different options firms have to organize economic activity.,LO 8-3,Describe two types of vertical integration along the industry value chain: backward and forward vertical integration.,LO 8-4,Identify and evaluate benefits and risks of vertical integration.,LO 8-5,Describe and examine alternatives to vertical integration.,LO 8-6,Describe and evaluate different types of corporate diversification.,LO 8-7,Apply the core competence market matrix to derive different diversification strategies.,LO 8-8,Explain when a diversification strategy creates a competitive advantage, and when it does not.,8-,36,LO 8-1Define corporate-level,Leveraging Core Competencies for Corporate Diversification,Core competence,Unique skills and strengths,Allows firms to increase the value of product/service,Lowers the cost,Examples:,Walmart global supply chain,Infosys low-cost global delivery system,The core competence market matrix,Provides guidance to executives on how to diversify in order to achieve continued growth,8-,37,Leveraging Core Competencies f,EXHIBIT 8.8,The Core Competence Market Matrix,BoA - NCNB,BoA - Merrill Lynch,Pepsi - Gatorade,S,8-,38,EXHIBIT 8.8The Core Competence,Corporate Diversification,Diversification discount,Stock price of diversified firms is less,Diversification premium,Stock price of diversified firms is greater,Will diversification increase performance?,8-,39,Corporate DiversificationDiver,EXHIBIT 8.9,The Diversification-Performance Relationship,8-,40,EXHIBIT 8.9The Diversification,Corporate Diversification (contd),How does diversification enhance performance?,Economies of scale, lower the cost,Economies of scope increase the value,Reduce cost and increase value simultaneously,8-,41,Corporate Diversification (con,EXHIBIT 8.10,Vertical Integration and Diversification: Sources of Value Creation and Costs,8-,42,EXHIBIT 8.10Vertical Integrati,Co