Hill 8e Basic Ch09

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Theory of Strategic Management with Cases, 8e

Hills, Jones

Chapter Nine Strategy at the Corporate Level


Corporate-Level Strategy: How do we sustain competitive advantages in our current business? What new businesses or industries do we wish to enter?

Corporate-Level Strategy

Corporate strategy is used to identify: 1. Businesses or industries that the company should

compete in2. Value creation activities that the company should

perform in those businesses 3. Methods to enter or leave businesses or industries

in order to maximize its long-run profitability

Companies must adopt a long-term perspective in formulating a corporate-level strategy.


Corporate-Level Strategy and the Multibusiness Model

A multibusiness company must construct its business model at two levels:

1. Business models and strategies for each business unit or division in every industry in which it competes

2. Higher-level multibusiness model that justifies its entry into different businesses and industries


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

Repositioning and Redefining A Company’s Business Model

Corporate-level strategies are primarily directed toward improving a company’s competitive advantage and profitability in its present business or product line:


Horizontal Integration:Single-Industry Strategy

Focus resources Resources devoted to competing successfully in one area

‘Stick to the knitting’ Company stays focused on what it does best

Horizontal Integration: the process of acquiring or merging with industry competitors in an effort to achieve the competitive advantages that come with large scale and scope.

Staying inside a single industry allows a company to:


Benefits of Horizontal IntegrationProfits 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


Problems with Horizontal Integration

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• Create too much industry consolidation• Have the potential for future abuse of market power


Vertical Integration: Entering New Industries

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


Stages in the Raw-Materials-to-Costumer Value-Added Chain

Figure 9.1


Raw-Materials-to-Costumer Value-Added Chain in the Personal Computer Industry

Figure 9.2


Full and Taper IntegrationFigure 9.3


A company pursues vertical integration to strengthen the business model of its core business or to improve its competitive position.

Increasing Profitability Through Vertical Integration

1. Facilitates investments in efficiency-enhancing specialized assets• Lowered cost structure or better differentiation.

2. Enhances or protects product quality• To strengthen its differentiation advantage through either

forward or backward integration3. 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


Problems with Vertical Integration

Vertical integration can weaken a business model when: • Company-owned suppliers lack incentive to reduce costs• Changing demand or technology reduces ability to be competitive

Increased Cost Structure• Company-owned suppliers develop a higher cost structure than

those of the independent suppliers• Bureaucratic costs of solving transaction difficulties

Fast-changing Technology• Vertical integration may lock into old or inefficient technology• Prevent company from changing to a new technology that could

strengthen the business model Unpredictable Demand Creates risk in vertical integration investments


Alternatives to Vertical Integration: Cooperative Relationships

Short-term contracts and competitive bidding• May signal a company’s lack of commitment to its supplier

Strategic alliances and long-term contracting• Enables creation of a stable long-term relationship• Becomes a substitute for vertical integration• Avoids the problems of having to manage a company located in an

adjacent industry Building long-term cooperative relationships

• Hostage taking – creating a mutual dependency• Credible commitments – a believable promise or pledge• Maintaining market discipline – power to discipline supplier

• Periodic contract renegotiation • Parallel sourcing policy


Strategic Outsourcing

Company is choosing to focus on a fewer number of value-creation activities

In order to strengthen its business model Companies typically focus on 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

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.


Strategic Outsourcing of Primary Value Creation Functions

Figure 9.4


Benefits of Outsourcing1. Lower 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 there is: • Holdup – company becomes too dependent on specialist provider• Loss of information – company loses important customer contact or competitive information

Documents

Hill 8e Basic Ch09