o Chapter 9 – Corporate-Level Strategy: Horizontal Integraon, Vercal Integraon, and

Strategic Outsourcing
o Overview
116) Corporate-Level Strategy Decisions: deciding business and industries the rm should compete
in; selec ng the value crea on ac vi es to be performed in those businesses; determining how to
enter, consolidate, or exit businesses or industries to increase long-term pro tability; enable company
to sustain or promote a compe ve advantage in current business and in any new ventures
1. Role of Managers: think long-term; consider how changes in industry, product,
technology, customers and compe tors will aect rm’s current business model and future
strategies; decide
o Corporate-Level Strategy & the Mul-Business Model
117) Corporate-Level Strategies: drive business model over me; determine business- and func onal-
level strategies taken to maximize long-term pro ts; should allow company or business unit to perform
value- chain ac vi es at a lower cost and/or in a way that increases dieren a on; pricing depends on
corporate-level strategy chosen; promote success of business-level strategies, achieve sustainable
compe ve advance, create higher pro tability
118) Mul -Business Model: business model for entry into new businesses or industries; explain how
and why entering a new industry will increase overall pro tability using exis ng competencies and
strategies Horizontal Integraon: Single-Industry Corporate Strategy
119) Single Industry Advantages: company can focus all managerial, nancial, technological, func onal
resources and capabili es on compe ng successfully in that one area; when industry is fast-growing and
changing, demands on resources and capabili es likely to be strong, but poten al pro ts can be
substan al; company stays focused on what it knows and does best; avoid entering industry where li*le
value is created by exis ng resources and capabili es; avoids entering an industry with new compe ve
industry forces and unan cipated threats
120) Single Industry Challenges: changing market condi ons and customer needs make it di4cult to
sustain a successful business model over me; managers may focus too much on posi oning current
products, that they ignore the poten al for new products or market opportuni es;
1. Corporate-Level Strategy: allows managers to an cipate future trends; managers can
change business models towards a changing environment
121) Horizontal Integra on: process of acquiring or merging with industry compe tors to achieve
compe ve advantages that arise from a large size and scope of opera ons; signi cantly improves
compe ve advantage and pro tabili es of companies whose managers focus on value crea on within
one industry
1. Acquisi on: company uses capital (stock, debt, cash) to purchase another company
2. Merger: agreement between equals to pool their opera ons and create a new en ty
3. Bene ts: lowers cost structure; increases product dieren a on; leverages
compe ve advantage more broadly; reduces industry rivalry; increases company
bargaining power
1) Lower Cost Structure: increases economies of scale; rms able to spread xed
costs over a large volume, decreasing unit costs; lower cost structure when company
can reduce the duplica on of resources between two rms, but cost savings o<en
overes mated
 2) Increased Product Dieren a on: improve Dow of innova ve new products a
company can sell to its customers; company can combine product lines of merged
companies to oer bundles of products; company can cross-sell its products
- Product Bundling: customers given opportunity to purchase mul ple products
for a single combined price; increases value of product line since price discounts
are realized; customers grow accustomed to transac ng with only one
company; source of compe ve advantage
- Cross-Selling: company leverages established rela onships with customers by
acquiring addi onal product lines or categories that it can sell to them;
company increases dieren a on by being the source of a total solu on;
company able to sa sfy a group of speci c needs; customers save me and
money, do not have to work with mul ple suppliers; company able to increase
its market share
3) Leverage Compe ve Advantage: can increase pro tability if dis nc ve
competencies can be valuably deployed across mul ple market segments or
geographies
4) Reduced Industry Rivalry: mergers and acquisi ons eliminate excess capacity
which would otherwise trigger price wars, stabilizing the market environment; easier to
implement tacit price coordina on between fewer compe ons; the fewer compe tors
that exist, the easier it becomes to create informal pricing agreements
- Tacit Price Coordina on: price coordina on a*ained without communica on
5) Increased Bargaining Power: can inDuence suppliers or buyers more strongly; can
increase pro tability at expense of suppliers and buyers; company can control a greater
percentage of an industry’s product or output, making customers more dependent;
increased market power results from the ability to raise prices to buyers and bargain
down input prices
4. Problems: implementa on is di4cult; dierent company cultures, high management
turnover when acquisi on is hos le, overes ma ons on bene ts and underes ma ons on
problems can lessen the changes of increased pro tability from horizontal integra on; can run
into problems with the Federal Trade Commission (FTC), merger or acquisi on can be blocked
1) Federal Trade Commission (FTC): government agency that enforces an trust laws;
concerned with abuse of market power; recognize that increased compe on improves
consump on ability; prevents large rms from making further acquisi ons that would
allow them to raise consumer prices above a level that would exist in a more
compe ve situa on, seen as an abuse of market power; prevents dominant companies
from using market power to crush poten al compe tors
o Vercal Integraon: Entering New Industries to Strengthen the “Core” Business Model
122) Ver cal Integra on: company expands opera ons either backward into an industry that produces
inputs or forward into an industry that uses, distributes, or sells the products; company enters industries
that support business model of its core industry; can either set up its own opera ons or acquire another
company already in that industry
1. Core Industry: industry that is the primary source of compe ve advantage and pro tability
2. Mul -Business Model & Ver cal Integra on: must explain how entry will enhance
long-term pro tability; model based on company entering industries that add value to core
products by increasing dieren a on or lowering cost structures
123) Stages of Value-Added Chain: at each stage, value
added to the product; company at one stage takes product
produced in previous stage and transform it such that it is
worth more to a company at the next stage, eventually the
customer; each stage of the value-added chain is a separate
industry with dierent compe tors
1. Ver cal Integra on Decision: choose within which industries in the value-added
chain to operate and compete; judge how much establishing opera ons at that stage will
increase product dieren a on and lower costs, increasing pro tability
124) Increasing Pro tability through Ver cal Integra on
1. Facilita ng Investments in Specialized Assets: investments in such assets can lower
cost structures or dieren ate products, achieve a compe ve advantage; o<en
necessary for suppliers to invest in specialized assets also, but di4cult to persuade them
to; company ver cally integrates to overcome mutual dependence
1) Specialized Asset: designed to perform speci c task; value signi cantly
reduced in next-best use
2) Mutual Dependence: both the company and its supplier believe that they will
become dependent on the other; supplier feels they will only be able to produce for the
company; company feels as though they would need supplier to complete the product;
from each perspec ve, the dependency gives the other greater bargaining power, which
is perceived as too much of risk; lack of trust arises from risk of holdup
- Holdup: being taken advantage of by a trading partner a<er an investment in
specialized assets has been made
3) Tapered Integra on: rm makes some of the input and buys some of the input;
can take advantage of the supplier market but s ll improve their own bargaining power
and avoid holdup; can be*er evaluate cost and quality of external suppliers of that
input
2. Enhancing Product Quality: entrance into other stages ensures core business products
are of high quality and dieren a on advantage is reinforced; greater quality oered, the
more premium of a price can be charged; backward; backwards integra on could improve
product quality, whereas forward integra on can improve the quality of service and other
factors of customer rela onship
3. Improved Scheduling: ver cal integra on makes it quicker, easier, more cost-eec ve to
plan, coordinate and schedule the transfer of a product between adjacent stages of the value-
added chain
125) Problems with Ver cal Integra on: can increase structure, can be marred by technology changes,
can be troubled by unpredictable demand; high-speed environmental change disincen ves integra on
since asset investments are at a greater risk of obsolescence
1. Ver cal Disintergra on: when a company decides to exist industries either forward or
backward in the industry value chain to its core industry to increase pro tability; not necessarily
a bad move, some mes necessary to prevent future losses
2. Increasing Cost Structure: company can make the mistake of purchasing inputs from a
company-owned supplier with a higher cost structure than independent supplier; company-
owned suppliers do not compete with independent suppliers because they are guaranteed sales
 o to other divisions; company-owned suppliers do not ac vely seek ways in which to
decrease their transfer prices and make themselves more compe ve, because they do not
have to
1) Transfer Price: price that one division of a company charges another division
for its products, which are the inputs the other division needs to create its own
goods
2) Bureaucra c Costs: costs of solving transac onal di4cul es that arise from
managerial ine4ciencies and the need to manage handos or exchanges between
business units to promote increased dieren a on or lower cost structures; can
become signi cant within the cost structure because considerable me and eort must
be spent elimina ng ine4ciencies
3. Technological Change: ver cal integra on can lock rm into old, ine4cient technology,
stop it from changing to a new one that would improve its business model; company with old
technology can lose its compe ve advantage very quickly
4. Demand Unpredictability: makes ver cal integra on risky because it becomes
di4cult to manage the volume or Dow of products along the value-added chain
o Alternaves to Vercal Integraon: Cooperave Relaonships
126) Quasi Integra on: use of long-term rela onships, or investment into some of the ac vi es
normally performed by suppliers or buyers, in place of full ownership of opera ons that are backward
or forward in the supply chain
127) Short-Term Contracts & Compe ve Bidding
1. Compe ve Bidding Strategy: independent component suppliers compete to be chosen
to supply a par cular component; supplier with best bid receives a short-term contract;
suppliers o<en compete on price, decreasing cost of inputs; suppliers will not make
investments into special assets because they are not ed long-term to the company, so no
chance of dieren a on and cost advantages; works best when minimal need for coopera on
exists, specialized assets not needed to improve scheduling, enhance product quality, or
reduce costs
1) Short-Term Contracts: last for a year or less; establish price and condi ons
surrounding interac ons with suppliers, distributors, retailers, etc.
128) Strategic Alliances & Long-Term Contrac ng
1. Strategic Alliances: long-term, coopera ve rela onships; both companies agree to make
specialized investments; both companies work together to nd ways to lower costs or increase
product quality to mutual bene t; subs tutes for ver cal integra on as a stable long-term
partnership where the same bene ts arise; avoids problems of ver cal integra on
129) Building Long-Term Coopera ve Rela onships: addressing how long-term coopera ve
rela onships can be pro table and enduring when there are the fears of holdup or being cheated
1. Hostage Taking: exchanging valuable resources to guarantee that each partner to
an agreement will keep their end of the deal; makes the two companies mutually
dependent
2. Credible Commitments: believable promise or pledge to support the development of
long-term rela onships between companies; viola ons can be drama c
3. Maintaining Market Discipline: risk that alliance partner might become ine4cient over
me; can raise the cost structure; companies must have power to discipline partners if need
arise; all long-term commitment contracts have periodic renego a ons, can threaten not to
renew the contract; parallel sourcing policies can protect against overdependence
 1) Parallel Sourcing Policy: company enters into long-term contracts with at
least two suppliers for the same component; can switch all business to other
supplier if one is being di4cult
o Strategic Outsourcing
130) Specialized Companies: can perform one of a company’s own value-
chain ac vi es such that it contributes to the company’s dieren a on
advantage of lowers its cost structure
131) Strategic Outsourcing: decision to allow one or more of a company’s
value- chain ac vi es to be performed by independent, specialist
companies that focus all their skills and knowledge on just one kind of
ac vity to increase
o performance; company decides to strengthen its business model by focusing on a fewer
number of value crea on ac vi es; o<en outsource those ac vi es that do not directly contribute to
dis nc ve competencies and compe ve advantage
1. Outsourcing & Long-Term Commitments: rela onships between company and
independent rm are treated as long-term contracts; much informa on is shared between
company and the specialist organiza on
2. Virtual Corpora on: companies that have pursued extensive strategic outsourcing;
companies that only perform the core value crea on func ons that translate into compe ve
advantages
132) Bene ts of Outsourcing: lowers cost structure; increases product dieren a on; allows
company to focus on most important dis nc ve competencies
1. Lower Cost Structure: costs reduced when price payable to specialist company is less
than what it would cost company to internally perform that ac vity in-house; specialists are
able to realize scale economies of other e4ciencies; specialist companies also more likely to
a*ain learning eects much more rapidly due to the cumula ve result of specialized and
repeated skills; ac vi es are also o<en outsourced to geographic regions where wage rates
are much lower
2. Enhanced Dieren a on: quality of ac vity performed by specialists may be greater than
if that same ac vity was performed in-house; specialists may be able to achieve a lower error
rate; company outsourced to may have an excellence dimension of quality which company itself
can bene t from
3. Focus on Core Business: managers can focus their energies and company resources on
performing core ac vi es that have most poten al to create value and compe ve advantage;
companies can improve core competencies and are able to push out the value fron er
133) Risks of Outsourcing: holdup; possible loss of important informa on; risks must be assessed
before outsourcing decision is made; risks can be reduced with appropriate steps
1. Holdup: risk that company will become too dependent upon specialist provider of an
outsourced ac vity; risk that specialist will use dependency to raise prices beyond some
previously agreed-upon rate; can be reduced using a parallel sourcing policy; can create power
over specialist by threatening not to renew the contract in the case of aggressive behaviour
2. Increased Compe on: build industry-wide resource that lowers barriers to entry; large
rms may nd that large size is not enough to protect them from compe ve pressures; high
investments in xed assets can become a constraint; contracted companies move down learning
curve, improve in their capabili es, crea ng an advantage for themselves; contract companies
o increase scope of ac vi es over me, may eventually product own end products in
compe on with customers
3. Loss of Informa on & Forfeited Learning Opportuni es: reckless company can lose
important compe ve informa on by outsourcing ac vi es; feedback and other informa on
received by contracted companies is wasted if not forwarded to the company accurately or
mely; rm’s risks become hollow