Professional Documents
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Exam 2 Chap6-10
Exam 2 Chap6-10
Vertical
Integration
Vertical Integration
Questions of Outsourcing?
What is offshoring?
Is outsourcing or offshoring good?
What are the ethical implications for
outsourcing?
What are the ethical implications for
offshoring?
What are the implications for different
stakeholder groups?
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
22
Vertical Integration
Mission
Strategic
Choice
Objectives
Strategy
Implementation
Competitive
Advantage
Which Businesses
to Enter?
Internal
Analysis
Corporate Level
Strategy
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
Vertical Integration
33
Vertical Integration
44
Vertical Integration
Seed Companies
Pizza Chains
Leprino Foods
(Mozzarella Cheese)
Crop Farmers
End Consumer
Food Distributors
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
55
Vertical Integration
Dairy Farmers
Backward
Vertical
Integration
(milk)
Seed Companies
Pizza Chains
Leprino Foods
(Mozzarella Cheese)
Crop Farmers
End Consumer
Food Distributors
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
Forward
Vertical
Integration
Barney & Hesterly
66
Vertical Integration
Dairy Farmers
Backward
Vertical
Integration
(milk)
cost reduction
revenue enhancement
the focal firm is able to
capture above normal
economic returns
(avoid perfect competition)
Leprino Foods
(Mozzarella Cheese)
Food Distributors
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
Forward
Vertical
Integration
77
Vertical Integration
Competitive Advantage
If a vertical integration strategy meets the
VRIO criteria
Is it Valuable?
Is it Rare?
Is it costly to Imitate?
Is the firm Organized to exploit it?
it may create competitive advantage.
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
88
Vertical Integration
99
Vertical Integration
Manage
Opportunism
Exploit
Flexibility
opportunism
may be checked
by internalizing
(TSI)
internalizing is
usually less
flexible
flexibility is
prized when
internalizing must
if not, then dont
uncertainty is
be less costly than
integrate exchange
high
opportunism
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10
10
Vertical Integration
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
11
11
Vertical Integration
12
12
Vertical Integration
13
13
Vertical Integration
Accounting
Finance
Marketing
HR
Engineering
Original
Business
Original
Business
Original
Business
Original
Business
Original
Business
New
Business
New
Business
New
Business
New
Business
New
Business
Cooperation
Conflict
Cooperation
Conflict
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
14
14
Vertical Integration
15
15
Vertical Integration
Budgets
separating strategic and
operational budgets
strategic: inputs
& outputs
operational: outputs
16
16
Vertical Integration
Integration
Opportunism
Leveraging
Capabilities
Cooperation
Exploiting
Flexibility
Time Horizon
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
17
17
Vertical Integration
International Expansion
The Cost Control Tradeoff
Cost
(Capital at Risk)
High
Greenfield Investment
Acquisition
Strategic Alliance
Franchising
Licensing
Exporting
Vertically
Integrated
Somewhat
Vertically
Integrated
Low
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
High
Barney & Hesterly
Control
18
18
Vertical Integration
Summary
Vertical Integration
makes sense when value chain economies
can be created and captured
may allow a firm to leverage capabilities
may be a response to the threat of opportunism
and uncertainty
as a form of exchange per se, is not rare nor
costly to imitate
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
19
19
Vertical Integration
Summary
Vertical Integration
is an important consideration in the decision
to expand internationally (range of possibilities)
makes sense when done for the right reasons,
under the right circumstances
can be a costly mistake if done wrong
Ownership is costlyintegrate only when the
benefits outweigh the costs of integration!
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
20
20
Chapter 8
Organizing to
Implement
Corporate
Diversification
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney &
8-1
Mission
Strategic
Choice
Objectives
Internal
Analysis
Strategy
Implementation
Competitive
Advantage
Implementing
Corporate
Diversification
8-2
2
Implementation Issues
How Information Flows
8-3
3
8-4
4
Divides Owners
From Managers
8-5
5
Monitors
Individual
Shareholders
Agents
Senior
Executives
Division
General
Managers
Corporate
Staff
Shared
Activity
Managers
Board
Of
Directors
Institutional
Shareholders
Dual
Role
8-6
6
Chief
Executive
Officer
(strategy formulation)
Chief
Operating
Officer
(strategy implementation)
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Prentice
Hall. All rights
reserved. Strategic
Management
& Competitive
Advantage - Barney &
Strategic
Management
& Competitive
Advantage
Barney
& Hesterly
8-7
7
8-8
8
Management Controls
3 Issues
Evaluating
Divisional
Performance
Measurement:
accounting
economic value
added (EVA)
Ambiguity:
allocating costs
& revenues
Allocating
Capital
Playing Games:
managers want
to look good
zero-based
budgeting
Transferring
Intermediate
Products
Setting Prices:
negotiation
cost
market-based
dual pricing
8-9
9
Compensation Policies
Compensation Committee
In theory
represents interests of owners in setting compensation
of top executive team
sets compensation based on performance or market
In practice
sometimes appear to be beholden to executives
compensation decisions often bear little relationship
to performance
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Prentice
Hall. All rights
reserved. Strategic
Management
& Competitive
Advantage - Barney &
Strategic
Management
& Competitive
Advantage
Barney
& Hesterly
8-10
10
Refocusing
Corporate level strategy may call for
exiting a business
a conglomeration discount may exist
the corporation may lack necessary skills
expected economies of scope may not exist
the corporation may need funds for core activities
Divest
Assets
MBO
or,
Spin-off
IPO
8-11
11
International Implementation
Global
Strategy
Centralized Hub:
facilitates global
integration
exploits a
global product
exploits scale
economies
Multi-Domestic
Strategy
Decentralized Federation:
highly autonomous units
very responsive locally
Coordinated Federation:
less autonomous
some shared activities
between divisions
8-12
12
International Implementation
Transnational
Structure
facilitates both local responsiveness
and global integration
country managers are responsible for
exploiting economies of scope
corporate HQ constantly scans the
globe looking for best practices
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Prentice
Hall. All rights
reserved. Strategic
Management
& Competitive
Advantage - Barney &
Strategic
Management
& Competitive
Advantage
Barney
& Hesterly
8-13
13
Summary
Successful implementation is a matter of:
appropriately breaking information processing
into manageable blocks
aligning the interests of owners and managers
8-14
14
Chapter 9
Strategic
Alliances
Strategic Alliances
Mission
Strategic
Choice
Objectives
Strategy
Implementation
Competitive
Advantage
Which Businesses
to Enter?
Internal
Analysis
Corporate Level
Strategy
Vertical Integration
Diversification
Strategic Alliances
mode of entry
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
22
Strategic Alliances
Strategic Alliance:
Any cooperative effort between two or more
independent organizations to develop,
manufacture, or sell products or services
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
33
Strategic Alliances
44
Strategic Alliances
Three Types
Of
Alliances
Nonequity
Alliance
Contracts
licensing
supply &
distribution
agreements
Joint
Venture
Equity
Alliance
Cross Equity
Holdings
partners own
stakes in
eachother
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
Joint Equity
Holdings
independent
firm is
created
55
Strategic Alliances
Value
Creation
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
66
Strategic Alliances
77
Strategic Alliances
88
Strategic Alliances
99
Strategic Alliances
10
10
Strategic Alliances
Holdup
Adverse
Selection
Moral
Hazard
misrepresenting
the value of inputs
providing inputs
of lesser value
than promised
11
11
Strategic Alliances
However,
The sources of value creation within alliances
may be rare.
firms may form a combination of complementary
resources within an alliance that is rare
the stock of such complementary resources may
be limited so that first movers have a rare combination
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
12
12
Strategic Alliances
However,
The resource combinations that create value in
alliances may be very costly, if not impossible,
to imitate if:
the value creating combination depends on
social complexity (trust), causal ambiguity,
and/or historical uniqueness
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
13
13
Strategic Alliances
Mergers &
Acquisitions
If:
Substitutes for
Strategic Alliances
transaction-specific
investment is high
low uncertainty about
the investment
there are no
anti-trust issues
low uncertainty about
the investment
firms can be
integrated easily
value of combined firms is
not tied to independence
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
14
14
Strategic Alliances
Joint Ventures
Equity Investments
aligns interests of
partners through
ownership of
independent firm
direct effect
aligns interests of
partners through
ownership in
each other
indirect effect
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
15
15
Strategic Alliances
Firm Reputations
the shadow of the
future constrains
cheating
16
16
Strategic Alliances
17
17
Strategic Alliances
International Expansion
Alliances may be attractive because:
local market knowledge is usually critical
governments may require a local partner
international expansion may be:
fraught with uncertainty
high risk
expensive
alliance investment may be more easily reversed
than internal development or acquisition
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
18
18
Strategic Alliances
Summary
Successful alliance managers will:
create alliances that will produce gains
from tradecomplementary resources
identify the sources of value creation
assess the likelihood of challenges to value
creation and allocation
adopt appropriate governance responses to
the challenges to value creation and allocation
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
19
19
Strategic Alliances
Summary
Alliances may generate competitive advantage if:
combinations of complementary resources
meet the VRIO criteria
governance responses meet the VRIO criteria
20
20
Chapter 10
Mergers and
Acquisitions
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney & Hesterly
10-1
Mergers
Mergersand
& Acquisitions
Acquisitions
Mission
Strategic
Choice
Objectives
Strategy
Implementation
Competitive
Advantage
Which Businesses
to Enter?
Internal
Analysis
Corporate Level
Strategy
Vertical Integration
Diversification
Mode of Entry?
Strategic Alliances
Mergers &
Acquisitions
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-2
2
Mergers
Mergersand
& Acquisitions
Acquisitions
10-3
3
Mergers
Mergersand
& Acquisitions
Acquisitions
Acquisitions
one firm buys another
firm
10-4
4
Mergers
Mergersand
& Acquisitions
Acquisitions
Acquisitions
can be a controlling
share, a majority, or
all of the target firms
stock
can be friendly or
hostile
usually done through
a tender offer
Barney & Hesterly
10-5
5
Mergers
Mergersand
& Acquisitions
Acquisitions
suppliers or customers
competitors
Related
Product Extension complementary products
Market Extension complementary markets
Unrelated
Conglomerate
everything else
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-6
6
Mergers
Mergersand
& Acquisitions
Acquisitions
10-7
7
Mergers
Mergersand
& Acquisitions
Acquisitions
10-8
8
Mergers
Mergersand
& Acquisitions
Acquisitions
10-9
9
Mergers
Mergersand
& Acquisitions
Acquisitions
Target
Firms
no value created
value increases by
about 25%
10-10
10
Mergers
Mergersand
& Acquisitions
Acquisitions
Business Angels
Venture Capital Firms (VC)
Initial Public Offering (IPO)
Cashing Out
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-11
11
Mergers
Mergersand
& Acquisitions
Acquisitions
Survival
Free Cash
Flow
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-12
12
Mergers
Mergersand
& Acquisitions
Acquisitions
Managerial
Hubris
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-13
13
Mergers
Mergersand
& Acquisitions
Acquisitions
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-14
14
Mergers
Mergersand
& Acquisitions
Acquisitions
Competitive Advantage
Can an M&A strategy generate sustained
competitive advantage?
Yes, if managers abilities meet VRIO criteria
1
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-15
15
Mergers
Mergersand
& Acquisitions
Acquisitions
Competitive Advantage
Recognizing and Exploiting Economies of Scope
Private Economies
Firm Cs recognized
value is $10,000
Firm A
Firm C
Firm B
Bidders
Target
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-16
16
Mergers
Mergersand
& Acquisitions
Acquisitions
Competitive Advantage
Recognizing and Exploiting Economies of Scope
Costly-to-Imitate
Economies
Firm A
Firm C
Firm B
Bidders
Target
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
if the economy
between A & C
is costly to imitate,
it doesnt matter
if other firms know
Firm A can still earn
a $2,000 profit
Barney & Hesterly
10-17
17
Mergers
Mergersand
& Acquisitions
Acquisitions
Competitive Advantage
Recognizing and Exploiting Economies of Scope
Unexpected
Economies
Firm C has a market
value of $10,000
Firm A
Firm C
Firm B
Bidders
Target
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-18
18
Mergers
Mergersand
& Acquisitions
Acquisitions
Competitive Advantage
Doing the Deal
Search for
Rare Economies
Limit Information
to Other Bidders
Seek Thinly
Traded Markets
Close the
Deal Quickly
Bidding Firms
Perspective
Limit Information
to the Target
Avoid Bidding
Wars
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-19
19
Mergers
Mergersand
& Acquisitions
Acquisitions
Competitive Advantage
Doing the Deal
Seek Information
from Bidders
Target Firms
Perspective
10-20
20
Mergers
Mergersand
& Acquisitions
Acquisitions
Implementation Issues
Structure, Control, and Compensation
M&A activity requires responses to these issues:
m-form structure is typically used
management controls & compensation policies
are similar to those used in diversification strategies
Managers must decide on the level of integration:
target firm may remain somewhat autonomous
target firm may be completely integrated
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-21
21
Mergers
Mergersand
& Acquisitions
Acquisitions
Implementation Issues
Cultural Differences
high levels of integration require greater cultural
blending
cultural blending may be a matter of:
combining elements of both cultures
essentially replacing one culture with the other
integration may be very costly, often unanticipated
the ability to integrate efficiently may be a source
of competitive advantage
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-22
22
Mergers
Mergersand
& Acquisitions
Acquisitions
Shark Repellents
Pac Man Defense
Crown Jewel Sale
Law Suits
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-23
23
Mergers
Mergersand
& Acquisitions
Acquisitions
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-24
24
Mergers
Mergersand
& Acquisitions
Acquisitions
International Issues
Government Policy
governments may constrain ownership by
foreign firms
governments may restrict repatriation of profits
government labor policy may limit a firms ability
to apply management practices to target firm
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-25
25
Mergers
Mergersand
& Acquisitions
Acquisitions
International Issues
Cultural Issues
Individualism
Social Orientation
Collectivism
Respect
Power Orientation
Tolerance
Acceptance
Uncertainty Orientation
Avoidance
Aggressive
Goal Orientation
Passive
Long-term
Time Orientation
Short-term
(Hofstede, 1980)
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-26
26
Mergers
Mergersand
& Acquisitions
Acquisitions
Summary
M&A activity is a mode of entry for vertical
integration and diversification strategies
A firms M&A strategy should satisfy the
logic of corporate level strategy
M&A activity can create economic value at
announcement, but target firms usually capture
that value
M&A activity can create value over the long term
for the acquiring firm
Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &
Competitive Advantage - Barney
& Hesterly
Strategic
Management & Competitive Advantage
10-27
27