9-1

Corporate Strategy -- Vertical

Integration, Diversification, and
Strategic Alliances
Text by
Charles W. L. Hill
Gareth R. Jones

Multimedia Slides by
Milton M. Pressley
Univ. of New Orleans

Copyright 1998 by Houghton Mifflin Company. All rights reserved.

 9-2

Preview

 Concentration on a Single Business

 Vertical Integration
 Alternatives to Vertical Integration:
Cooperative Relationships and Strategic
Outsourcing
 Diversification
 Strategic Alliances as an Alternative to
Diversification
Copyright 1998 by Houghton Mifflin Company. All rights reserved.
 9-3

Concentration on a Single
Business

R S
A
SE Coca-Co
la
o n a l d s
McD
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 9-4

Concentration on a Single
Business (Continued)
Advantages
• Allows Company to Focus Resources and
Capabilities in Just One Area
• Does Not Diversify Into Areas That It
Knows Little About and Where Resources
and Capabilities Add Little Value

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 9-5

Concentration on a Single
Business (Continued)
Disadvantages
• Vertical Integration May Be Required to
Create Value and Establish a Competitive
Advantage
• Opportunities May Be Missed

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 9-6

Vertical Integration
• Vertical Integration Defined

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 9-7
Figure 9.1: Stages in
Raw
the Raw Material to
Materials
Consumer Value
Intermediate
Manufacturer
Chain

Assembly

Distribution

End User

Upstream Downstream
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 9-8

Figure 9.2: The Raw Material to Consumer

Value Chain in the PC Industry
Raw Dow Chemicals
Materials Union Carbide Examples

Intermediate
Intermediate Intel
Manufacturer
Manufacturer Motorola

Apple
Assembly
Compaq

Bizmart
Distribution
Computer World

End User

Copyright 1998 by Houghton Mifflin Company. All rights reserved.

 9-9

Figure 9.3: Full and Taper

Integration
Full Integration

Suppliers
Suppliers A B C Customers
Customers

Taper Integration

Suppliers
Suppliers A B C Customers
Customers

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 9-10

Creating Value Through

Vertical Integration

• Building Barriers to Entry

• Facilitating Investments in
Specialized Assets
• Protecting Product Quality
• Improved Scheduling

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 9-11

Arguments Against Vertical

Integration
• Cost Disadvantages
• Technological Change
• Demand Uncertainty

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 9-12

Bureaucratic Costs and the

Limits of Vertical Integration
• Lack of Incentive to Reduce
Operating Costs
• Lack of Strategic Flexibility in
Times of Changing Technology
• Uncertain Demand

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 9-13
Alternatives to Vertical Integration:
Cooperative Relationships and
Strategic Outsourcing

• Short-Term Contracts
and Competitive Bidding

Copyright 1998 by Houghton Mifflin Company. All rights reserved.

 9-14
Alternatives to Vertical Integration:
Cooperative Relationships and
Strategic Outsourcing

• Short-Term Contracts
and Competitive Bidding

• Strategic Alliances and

Long-Term Contracting

Copyright 1998 by Houghton Mifflin Company. All rights reserved.

 9-15

Alternatives to Vertical Integration:

Cooperative Relationships and
Strategic Outsourcing
Building Long-Term
Cooperative Relationships
• Hostage Taking
• Credible Commitments
• Maintaining Market Discipline
– Periodic Renegotiation
– Parallel Sourcing Policy

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 9-16

Alternatives to Vertical
Integration: Cooperative
Relationships and Strategic
Outsourcing
• Outsourcing
• Virtual Corporation

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 9-17

Diversification
• Related
Diversification

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 9-18

Diversification
• Related
Diversification

• Unrelated
Diversification

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 9-19

Diversification
Creating Value Through
Diversification
• Acquiring and Restructuring
• Transferring Competencies
• Economies of Scope

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 9-20

Diversification
Bureaucratic Costs and the Limits of
Diversification
• Number of Businesses
• Coordination Among Businesses

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 9-21

Figure 9.4: Structure of a Company Sharing

Marketing Between Two Business Units

Head Office

Household Packaged
Marketing
Products Food Products

Consumers

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 9-22

Diversification
Bureaucratic Costs and the Limits of
Diversification (Continued)
• Number of Businesses
• Coordination Among Businesses
• Limits of Diversification

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 9-23

Diversification
Diversification That
Dissipates Value
• Diversification to Pool Risks
• Diversification to Achieve
Greater Growth

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 9-24

Related and Unrelated

Diversification
Table 9.1: Comparing Related and Unrelated Diversification

Source of
Ways of
Strategy Bureaucratic
Creating Value
Costs
 Restructuring  Number of
Related  Transferring Skills Businesses
Diversification  Economies of  Coordination
Scope Among Businesses
 Restructuring  Number of
Unrelated Businesses
Diversification

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 9-25

Strategic Alliances as an
Alternative to Diversification
• Strategic Alliance Defined
• Advantages:
– Firms May Create Value by Realizing Economies of
Scope
– Enable Companies to Swap Complementary Skills
• Disadvantage
– Profits Must Be Split
– Risk That One Firm May Give Away Critical Know-How
That May Create a Competitor from the Alliance Partner

Copyright 1998 by Houghton Mifflin Company. All rights reserved.

 ter Summary
9-26

Chapte

 CONCENTRATION ON A SINGLE
BUSINESS
 VERTICAL INTEGRATION
IV ES T O V ER TIC A L IN T E-
 ALTERNAT IP S
P ER A T IV E R E L A TIO N S H
GRATION: COO
D S TR AT EG IC O U TS O U R C IN G
AN
 DIVERSIFICATION
IA N C E S A S A N AL T E R N AT IVE
 STRATEGIC AL L
TO DIVERSIFICATION

Copyright 1998 by Houghton Mifflin Company. All rights reserved.