CORPORATESTRATEGY:

HORIZONTAL&VERTICAL
INTEGRATION,STRATEGIC
OUTSOURCING
BUSINESS189
SPRING2007
DR.MARKFRUIN

CORPORATESTRATEGY
NOTBUSINESSLINESTRATEGYor
PRODUCTS/PLATFORMS/MARKETS
CHOICESFIRMSMAKEWHENPURSUING
MULTIBUSINESSSTRATEGY
CHOICESSHOULDADDVALUE
EITHERCREATEMOREVALUEATLOWERCOST
ORENABLESUPERIORDIFFERENTIATIONTHAT
BRINGSPREMIUMPRICING
BUTGOBEYONDGENERICSTRATEGIES,IFPOSSIBLE
GOINGBEYONDOFTENCHARACTERIZEDAS
SYNERGY;MORETHANSUMOFTHEPARTS

LOOKINGUPORDOWN?
TRADITIONALLY,THEARGUMENTHAS
BEENTHECORPORATELEVEL
STRATEGYSETSTHECONTEXTFOR
BUSINESSLEVELSTRATEGY
ALTERNATIVELY,LOOKUPWARDAND
SAYTHATBUSINESSLEVELSTRATEGY
SHOULDSETTHECONTEXTFOR
CORPORATELEVELSTRATEGY
WHICHISRIGHTINYOUROPINION?

FROMTHERBVPERSPECTIVE

ITMAKESSENSETOSAYTHAT
BUSINESSLEVELSTRATEGIESSETTHE
CONTEXTFORCORPLEVELSTRAT
BECAUSEASSETSPECIFICITYANDTHE
STICKINESSOFRESOURCESMAKETHEM
HARDTOLEVERAGEBROADLY
UNFORTUNATELY,CORPEXECUTIVES
OFTENTHINKTHATTHEYCAN
MOBILIZERESOURCESEFFECTIVELY
Icanmanageanythingpointofview

Generalmanagementasopposedtospecificskills

CORPORATESTRATEGYSHOULD
ESTABLISHDISTINCTIVECOMPETENCIES
ANDCOMPETITIVEADVANTAGESAT
MULTIPLEBUSINESSLEVELS
TYPOLOGYOFFIRMTYPES
SINGLEPRODUCTFIRM(>80%OFSALES)
DOMINANTPRODUCTFIRM(>60%)
RELATEDPRODUCTFIRM
RELATEDINTERMSOFTECHNOLOGY
RELATEDINTERMSOFMARKET

UNRELATEDPRODUCTFIRM(conglomerate)
UNRELATEDBYDESIGNORBYTIME?

DIFFERENTIATIONVS
DIVERSIFICATION
OFTENHARDTODISTINGUISH
FROMTHERBV,DIFFERENTIATIONCANBE
ACCOMPLISHEDONTHEBASISOF
EXISTINGRESOURCES&CAPABILITIES
(ALTHOUGHTHEYBEUSEDINNEWWAYS)
DIVERSIFICATIONREQUIRESNEW
RESOURCES&CAPABILITIES
AUTOMAKERMOVESINTOAUTOPARTS
DIFFERENTIATIONORDIVERSIFICATION?

DIVERSIFICATION
MEANSNOTSTICKINGTOTHE
KNITTING
HORIZONTALINTEGRATIONVS
VERTICALINTEGRATION:
WHATSTHEDIFFERENCE?
WHATSTHELOGIC?
WHATSTHELIKELYOUTCOME?

HORIZONTALINTEGRATION
MERGERWITH&ACQUISITIONOFFIRMSINTHE
SAMEINDUSTRY
HOWTODEFINEINDUSTRYBOUNDARIES
ISIBMGLOBALSERVICESSAMEINDUSTRYASIBM?
IBMHARDWARE?IBMSOFTWARE?
ISAPPLESAMEINDUSTRYASHP/COMPAQ?

USUALLY(INPAST)HORIZONTALINTEGRATION
PRECEDESVERTICALINTEGRATIONWHY?
RECENTEXAMPLES:DAIMLERBENZBUYS
CHRYSLER;BOEINGBUYSMCDONALDDOUGLAS;
HPBUYSCOMPAQ
AGOODTHING?HOWADDVALUE?

HORIZONTALINTEGRATION

TEXTSAYSADVANTAGESOF
HORIZONTALINTEGRATIONARE
REDUCEDCOSTS
INCREASEDVALUETHROUGH
DIFFERENTIATION

PRODUCTBUNDLING
TOTALSOLUTIONSELLING
CROSSSELLING(FINANCIALSUPERMARKET)
STRATEGIESINMATUREINDUSTRIES

MANAGEDRIVALRY
ELMINATEEXCESSCAPACITY
PRICECOORDINATION

INCREASEDBARGAINING(MARKET)POWER

HORIZONTALINTEGRATION
PROBLEMS
PAYTOOMUCHUPFRONT
REALIZETOOLITTLEONBACKEND
HARDTOMERGERESOURCES,
CAPABILITIES&CULTURESOF
DIFFERENTFIRMS(EVENWITHIN
SAMEINDUSTRY)
ANTITRUSTCONCERNS
RISKSINCREASINGORDECREASING?
WHATSORTOFRISK?MKT/ORG/TECH

VERTICALINTEGRATION
BACKWARDORUPSTREAMINTEGRATION
MEANSBUYINGYOUROWNINPUTS
DOWNSTREAMORFORWARDINTEGRATION
MEANSDISPOSINGOFONESOUTPUTS
HISTORICALLY,V.I.CAMEAFTERH.I.INTHE
UNITEDSTATES:DUPONT,GM,GE
CURRENTSUPPLYCHAINSTRATEGIESARE
MOSTLYVERTICALINTEGRATIONSTRATEGIES
FULLVERSUSTAPERINTEGRATION

VALUECHAIN
THESTAGESOFRESOURCECONVERSIONFROM
INPUTSTOOUTPUTS
VALUECHAINISACHOICEABOUTHOWMANY
STAGESOFRESOURCECONVERSION(VERTICAL
INTEGRATION)TODOINTERNALLY
THETRADITIONALLOGICIS:
LESSEXPENSIVETODOITONESELF

MARKETSVSHIERARCHIESDEBATE
OPPORTUNISMANDBOUNDEDRATIONALITY
STABILITY&ACCESSTOMARKETSVARY
ITCANLOWERCOSTSOFHIERARCHY

WHENDOESITMAKESENSE
TOVERTICALLYINTEGRATE?
WHENUNIQUERESOURCESAVAILABLE
DISTINCTIVECOMPETENCIESMAYBEBASEDON
HAVINGTHERIGHT,LIMITEDRESOURCE/S

WHENITISHARDTOFINDSPECIALIZEDASSETS
NEEDEDINADJACENTSTAGES
RISKOFHOLDUP
RISKOFQUALITYPROBLEMS

PROTECT/LEVERAGEMARKETPOSITION
IMPROVESCHEDULING/TIMETOMARKET

FULLVSPARTIAL(TAPERED)
VERTICALINTEGRATION
TAPEREDINTEGRATIONOCCURSWHEN
FIRMSBUYFROMINDEPENDENT
SUPPLIERSINADDITIONTOSELFSUPPLY
WHYDOTHIS?

SECUREALTERNATIVESOURCESOFSUPPLY
COMPARATIVECOSTCONTROLS
UNDERSTANDNATUREOFASSETSPECIFICITY
PROTECTKEYRESOURCES/CAPABILITIES

DISADVANTAGESOF
VERTICALINTEGRATION
ITSCOSTLY
BESTUSEOFFUNDS?
NARROWSRANGEOFCHOICES/SOURCES
AVAILABLETOFIRM
MAYREDUCEINNOVATION
MAYNOTLEVERAGERESOURCES
EFFECTIVELYBECAUSEOF
BUREAUCRATISM
LOSSOFMOTIVATION
UNDEROROVERSUPPLYOFINPUTS(DEMAND
MANAGEMENT)

ALTERNATIVESTOVERTICAL
BUTNOTHORIZONTALINTEGR
PARTNERSHIPS
SHORTTERMCONTRACTS&COMPETITIVE
BIDDING
JOINTVENTURES
STRATEGICALLIANCES
STRATEGICOUTSOURCING

RELATIONALCONTRACTING
RELATIONSHIPBASEDPRICING/GOODWILL

SUPPLIERMANAGEMENTSTRATEGIES
INTERFIRMNETWORKSTRATEGIES
ALAJAPANESE(BUTNOTUS)AUTO&ELECTRONICS
FIRMS

OUTSOURCINGBENEFITS

REDUCECOSTS&CERTAINRISKS
SPEEDOFOPERATIONS
IMPROVEDFOCUS
INNOVATIONENHANCED&ACCELERATED
IMPROVEPRODUCTDIFFERENTIATION

EFFICIENCY
QUALITY
ENHANCEDCUSTOMERSATISFACTION
BESIDESFUNCTIONALSTRATS,BETTERLBSTRATS:
PRODUCT&MKTDEVELOPMENT,PROLIFERATION,
ETC.

OUTSOURCINGDRAWBACKS
THINKINGPROBLEMSHAVEGONEAWAY
HOLDUP
SCHEDULING&INTEGRATIONPROBLEMS
(COORDINATION&TRANSACTIONCOSTS)
DISPUTERESOLUTIONNOTSIMPLE
LOSSOFINFORMATION&POTENTIAL
PROPRIETARYKNOWHOW
LINKAGEBASEDKNOWHOWOFTENLOST
(VALUECHAINBASEDONLINKEDACTIVITIES)

CLSTRATASCOOPERATION
HORIZONTAL&VERTICALINTEGRATION
STRATEGIESARECOOPERATIVESTRATEGIES
SECUREDBYOWNERSHIP
NIELSENPORTER
POOLING
SHARINGACTIVITIES
EXCHANGE
TRANSFERSKILLS/
FINANCIALMANAGEMENT
COMPL.SPECIALRESTRUCTURING
IZATION
EXPERIMENT&WITHDRAWAL

ALTERNATIVESTOCL
STRATEGIES
CONGLOMERATE(AKINDOFUNRELATED
CLSTRATEGY)
BUSINESSGROUP(WITHORWITHOUT
HOLDINGCOMPANYCONTROL)
CHOOSERIGHTINDUSTRIALDISTRICTS
STRONGNETWORK
LOOSENETWORK

COOPERATIONSECURED&
UNSECUREDBYOWNERSHIP
CLSTRATEGIESAREGENERALLYSECUREDBY
OWNERSHIP
NETWORKBASEDSTRATEGIESAREOFTENNOT
SECUREDBYOWNERSHIP
WHYTHEDIFFERENCE?
TIMINGOFCOOPERATION;DOWNSTREAMCOOPIS
MOREDIFFICULTTHANUPSTREAM
CATCHUPORNOT
SPEEDOFCOOPACTIVITIES
ALTERNATIVESOURCESOFPOWER/GOVERNANCE
COMPLEXITYOFINTERACTIVEROUTINES
IMITATIONOFACTIONSDOESNOTREQUIRE

DUPLICATIONOFMEANS

NETWORKALTERNATIVES
TOYOTAGROUP
ABOUT10%OF1ST
TIERFIRMSHAVE
TOYOTAINVESTM.
COORDINATETHRU
TPS/JIT
ORGANIZATIONAL
PROPERTYRIGHTS
HIERARCHICAL
NETWORKWITH
MANYSUBSYSTEMS

SUNSJAVA&JINI
SUNNOTINVESTIN
DEVELOPERS
SUNRETAINSOS
PROPERTYRIGHTS
EVERYTHINGELSE
FAIRGAME
SCALEFREE
NETWORKWITHLOTS
OFSELFORGANIZING
&REDUNDANCY