STRATEGIC

MANAGEMENT
(2023)

Lecture 4. Integration, diversification

Titov Sergei Anatolyevich, MBA, PhD,
satitov@fa.ru
 OUR COURSE (2023)
 Class activity (10 – interim control/10)
(https://campus.fa.ru/mod/resource/view.php?id=504661)
 Individual testing (10 points – interim control):
 29 and 30 March 2023, 90 min long, online (campus.fa.ru);
 30 questions: 15 from 2022;
 https://campus.fa.ru/mod/quiz/view.php?id=509097
 Team project (10 points) (case analysis)
 https://campus.fa.ru/course/view.php?id=20524#section-13
 Exam (60 points)
5 GENERIC STRATEGIES
Type of competitive advantage
Cost advantage Product advantage
Broad market

1. Cost leadership 2. Differentiation

Narrow market

3. Focused cost leadership 4. Focused differentation

BLUE OCEAN
 INTEGRATION

(Vertical) integration means that the firm

performs itself the activity from the same
value chain system, the activity that the
firm previously hasn’t performed and that
is located upstream (integration
backwards) or downstream (integration
forwards).
 INTEGRATION
BACKWARDS(+)
Reduction of supplier power
Reduction in costs of major inputs
Assurance of the supply and flow of critical
inputs
Protection of proprietary know-how
More differentiation opportunities
 INTEGRATION
FORWARDS(+)
Increase bargaining power
Improve market visibility
Differentiate in service
Access to end users
Cut distribution costs
 INTEGRATION (-)
Increased business risk
Slow to embrace technological advances
Less flexibility in accommodating shifting buyer preferences
Inability to realize economies of scale
Capacity matching problems
Lack or slow development of new resources and capabilities
needed in new segments of the value chain
Channel conflicts (F)
Internal preferences and inefficiencies (B)
Bureaucracy and increase in administration costs
INTEGRATION (INDITEX)

Products are designed in La Coruna at the Inditex

headquarters
40% of fabric are supplied by Comidex (subsidiary of Inditex)
50% of products are manufactured by own factories
Distributed via own distribution center
Zara owns and manages almost all its retail stores
Zara is famous for its attractive prices accompanied by huge
variety and fast response to market
 INTEGRATION
(BENETTON)
Manufacturing: centralized, Benetton-owned processes
performs some manufacturing operations (especially those
requiring expensive technology); other operations performed
by a network of smaller contractors (usually owned by ex-
Benetton employees)
Distribution: through its own automated warehouses
Retail: since 2000 Benetton has been reshaping its retail
operations. At one time, the vast majority of Benetton retail
outlets were small shops run by third parties. Now these
small stores have been joined by several, Benetton-owned
and -operated, larger stores
 INTEGRATION
(BENETTON)

Manufacturing: It doesn’t have factories of its own, but 750

suppliers
Distribution: the stock management is handled internally,
physical distribution is subcontracted
Retail: all stores are owned and solely managed by H&M
TAPERED INTEGRATION

40% of fabric are supplied by Comidex (subsidiary of Inditex)

50% of products are manufactured by own factories
PARTIAL INTEGRATION

Centralized, Benetton-owned processes performs some

manufacturing operations; other operations performed by a
network of smaller contractors
 INTEGRATION
(DEGREE)
Benefits of using the market:
• Market firms can achieve economies of scale that in-house departments
producing only for their own needs cannot.
• Market firms are subject to the discipline of the market and must be
efficient, effective and innovative to survive. Overall corporate success may
hide the inefficiencies and lack of innovativeness of in-house departments.
• Access to the unavailable resources and capabilities.
Costs of using the market:
• Coordination through the vertical chain may be compromised when an
activity is purchased from an independent market firm.
• Private information may be leaked
• There may be costs of transacting that can be avoided by performing the
activity in-house.
 INTEGRATION
(DEGREE)
Outsourcing is appealing when outsourcing a particular value
chain activity:
• Results in the activity being performed better or more cheaply
• Improves organizational flexibility and speeds time to market
• Reduces the firm’s risk exposure to changing technology or
shifting buyer preferences
• Facilitates assembling diverse kinds of expertise speedily and
efficiently
• Allows the company to concentrate its energies on its core
business, better leverage its resource strengths, and do even
better what it already does best
 INTEGRATION
(DEGREE)
When a firm outsources too many or the wrong activities, it
risks:
• Hollowing out capabilities and being held hostage by
outside suppliers
• Losing touch with activities and expertise that determine
overall long-term success
• Undermining its ability to lead the development of
innovative new products (because cutting-edge ideas and
technologies for next-generation products now come from
outsiders)
ALLIANCES, JV,
NETWORKS
ALLIANCES, JV,
NETWORKS

As of 2012, the Wi-Fi Alliance

included over 550 member
companies
 ALLIANCES, JV,
NETWORKS

https://en.wikipedia.org/wiki/Renault
%E2%80%93Nissan
%E2%80%93Mitsubishi_Alliance

https://www.nytimes.com/
1983/02/15/business/gm-and- https://www.engineering.com/story/toyota-
toyota-produce-cars-in-joint- ford-gm-and-sae-form-automated-vehicle-
venture-at-plant-on-coast.html safety-consortium
 ALLIANCES, JV,
NETWORKS
Pharma firms Number of
alliances
GlaxoSmithKline 373
Pharmacia 370
Pfizer 287
Novartis 230
Elan 228
Biotech firms  
Applera 214
Chiron 172
Genentech 124
Genzyme 122
Shire 119
ALLIANCES, JV,
NETWORKS
 ALLIANCES, JV,
NETWORKS
Alliances and JVs may be horizontal (in the same industry):
• United Technologies and Daimler AG teamed up to cooperate on a range of engine
development activities
• Daimler AG and Renault-Nissan formed the alliance to share engine designs and to cut
design costs
• Shell and Pemex (Mexico’s petroleum company) lowered their investment by joint
ownership of Deer Park Refinery in Texas
They may be vertical:
• Oracle developed software for Intel’s 64-bit Itanium chip.
Or they may involve firms from different industries or competitors:
• Toys’R’Us and McDonald’s of Japan formed an alliance to build Toys’R’Us stores in Japan
that would include a McDonald’s restaurant (facilitated penetration in Japan)
• BMW Group and Mercedes-Benz Mobility AG are jointly driving forward digital mobility
solutions
ALLIANCES, JV,
NETWORKS
 ALLIANCES, JV,
NETWORKS
Kito T. et al. The structure of the
Toyota supply network: an empirical
analysis //Saïd Business School
WP. – 2014. – Т. 3.
ALLIANCES, JV,
NETWORKS
 ALLIANCES, JV,
NETWORKS
Benefits:
• Optimum combination of transaction and administration costs;
• Access to specific capabilities and resources;
• Speedy reconfiguration of capabilities;
• Mutual synergy;
• Enhanced learning;
• Spreading risks.
Costs:
• Discoordination and conflicts;
• Costs of coordination;
• Leak of information;
• Free rider problem.
DIVERSIFICATION

Benefits:
• Search for new growth
opportunities;
• Use economies of scope;
• Create new synergies between
businesses;
• Spread business risks
DIVERSIFICATION

Risks:
• Loose of concentration and
advantages (to specialized
companies);
• Bureaucracy and administration
costs;
• Coupling and spreading errors.
DIVERSIFICATION
TRENDS
 GROWTH STRATEGIES

• Internal building (organic ≈ integration)

• External purchasing (mechanic ≈ use of
market)
• Collaborative accessing (partnership-
based ≈ alliances and networks)
INTERNAL BUILDING
EXTERNAL PURCHASING
COLLABORATIVE
ACCESSING
Pharma firms Number of
alliances
GlaxoSmithKline 373
Pharmacia 370
Pfizer 287
Novartis 230
Elan 228
Biotech firms  
Applera 214
Chiron 172
Genentech 124
Genzyme 122
Shire 119
COLLABORATIVE
ACCESSING