Chapter 8 Corporate Strategy: Vertical Integration and Diversification
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Transcript of Chapter 8 Corporate Strategy: Vertical Integration and Diversification
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 8Corporate Strategy: Vertical Integration and Diversification
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Chapter Outline8.1 What Is Corporate Strategy?
8.2 The Boundaries of the Firm • Firms vs. Markets: Make or Buy?
• Alternatives on the Make-or-Buy Continuum
8.3 Vertical Integration along the Industry Value Chain• Types of Vertical Integration
8.4 Corporate Diversification: Expanding Beyond a Single Market• Types of Corporate Diversification
• Leveraging Core Competencies for Corporate Diversification
• Corporate Diversification and Firm Performance
8.5 Implications for the Strategist
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ChapterCase 8
Refocusing GE: A Future of Clean-Tech and Health Care?
In 2008, more than half of GE’s profits came from GE Capital.
Global financial crisis hit the company hard. • Stock price fell from $42.12 to $6.66 in 17 months!
GE launched two strategic initiatives: 1. Ecomagination − clean-tech focus
2. Healthymagination – increase access and reduce costs of health care services
Also sold 51% of NBC to Comcast in 2011 and the rest in 2013.
Courtesy of GE Healthcare
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Corporate strategy determines the firm’s boundaries along three dimensions: 1. Industry value chain
2. Range of products and services
3. Where to compete: geography
Key strategic management concepts used here:• Core competencies – unique strengths
• Economies of scale – average cost per unit decreases
• Economies of scope – savings producing two (or more) outputs
• Transaction costs – all internal and external costs associated with an economic exchange
8.1 What Is Corporate Strategy?
CORPORATE-LEVEL STRATEGY
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Explains and predicts the scope of the firm• "Market vs. firms" have differential costs
External transaction costs• Costs associated with economic exchanges
Ex: negotiating and enforcing contracts
Internal transaction costs• Costs pertaining to organizing an exchange within a firm
Ex: recruiting & training employees
8.2 The Boundaries of the Firm
TRANSACTION COST ECONOMIES
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Exhibit 8.2 Organizing Economic Activity: Firms vs. Markets
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Principal – owner of the firm, i.e., shareholders Agent – manager performing activities on behalf of the
principal Separation of ownership and control – one of the hallmarks
of a publicly traded company Principal−agent problem is almost inevitable.
• A manager may pursue his or her own interests such as job security and managerial perks (e.g., corporate jets and golf outings that conflict with the principal’s goals – in particular, creating shareholder value)
• One potential way to overcome the principal−agent problem is to give stock options to managers, thus making them owners.
PRINCIPLE-AGENT RELATIONSHIP
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Short-term contacts• Competitive bidding process• Less than one-year term• Lower prices cost advantages
Strategic alliances• Facilitate investment without administrative costs
Ex: Long-term contacts, equity alliances, joint ventures
Parent–subsidiary relationship• Most integrated alternative • Parent companies have command and control
Ex: GM owns Opel and Vauxhall in Europe
Alternatives on the Make-or-Buy Continuum
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Strategy Highlight 8.1
Toyota Locks Up Lithium for Car Batteries World demand for lithium-ion batteries for cars• Grew from $278 million in ‘09 to $25 billion in 2014
Toyota wants to secure long-term supply to power its hybrid fleet of over 5 million hybrids sold.
Orocobre holds rights to a large lithium deposit.• Upfront investment to extract of lithium is very high.
To encourage investment, Toyota invested $120 million in an equity position.
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In what stages of the industry value chain should the firm participate?
Vertical integration• Ownership of its inputs, production, & outputs in the
value chain• Vertical value chain• Industry-level integration from upstream to downstream
Examples: cell phone industry value chain• Many different industries and firms
8.3 Vertical Integration along the Industry Value Chain
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Exhibit 8.5 HTC’s Backward and Forward Integration along the Industry Value Chain in
the Smartphone Industry
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Securing critical supplies Lowering costs & improving quality Facilitating investments in specialized assets
Increasing costs & reducing quality
Reducing flexibility
Increasing the potential for legal repercussions
Benefits and Risks of Vertical Integration
SOME BENEFITS OF VERTICAL INTEGRATION
SOME RISKS OF VERTICAL INTEGRATION
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Exhibit 8.6 Taper Integration along the Industry Value Chain
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Degrees of diversification• Range of products and services a firm should offer
Ex: PepsiCo also owns Lay's & Quaker Oats, but sold off KFCDifferences in corporate strategy between KFC & Chick-fil-A
Diversification strategies• Product diversification
Active in several different product categories
• Geographic diversificationActive in several different countries
• Product–market diversificationActive in a range of both products and countries
8.4 Corporate Diversification: Expanding Beyond a Single Market
SECOND CORPORATE STRATEGY QUESTION
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Single-business firm derives >95% from one business Google revenues from online search
Dominant-business firm 70% to 95% from one businessHarley-Davidson yields 10% revenues from clothing
Related diversification strategy <70% from one business• Related-constrained – leverage current competencies
ExxonMobil strategic move into natural gas
• Related-linked – share only limited links to current businessAmazon move into cloud computing, Kindle tablets, & video
streaming
Unrelated diversification <70% and few if any links among businesses (a conglomerate)
GE, LG, Tata
Types of Corporate Diversification
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Strategy Highlight 8.2
The Tata Group: Integration at the Corporate Level
Tata Group of India founded in 1868 – uses unrelated diversification • Tea, hospitality, steel, IT, power, and automobiles • 500,000 employees and $100 billion in annual revenues
Tata Motors• The luxury division with the Jaguar and Land Rover brands
focused differentiation strategy for developed markets
• The Nano car division with the Tata Nano brand Focused cost-leadership strategy for emerging markets Targets non-consumers moving up from mopeds and bicycles
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Exhibit 8.8 The Core Competence-Market Matrix
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Does corporate diversification lead to superior performance?
The critical question to ask:• Are the individual businesses worth more under the
company’s management than if each were managed in separate firms?
Research finds an inverted U-shaped relationship• Type of diversification
• Overall firm performance
Corporate Diversification and Firm Performance
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Exhibit 8.11 Restructuring the Corporate Portfolio: The Boston Consulting
Group Growth-Share Matrix
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8.5 Implications for the Strategist
Effective corporate strategy helps to gain and sustain a competitive advantage.
Corporate strategy needs to be dynamic over time. • GE CEO Jeffrey Immelt formulated a new corporate
strategy in clean-tech and health care. (ChapterCase 8)
• Strategic positions of Nike and adidas another exampleadidas founded in 1924 focused on athletic shoes
Integrated manufacturing model
Globalization led adidas to less integration and wider sports apparel 2013 − 40% shoes, 50% apparel, 10% equipment
Nike started in 1978 as a vertically disintegrated firm.
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ChapterCase 8
Consider This…• 2012 – GE split the energy business into three SBUs: Power
and Water; Oil and Gas; and Energy Management.This move has both internal and external benefits.
• GE increasing its global footprintInternational sales were 19% in 1980; to over 52% in 2012.Tackling big problems isa strength for a conglomerate.
• India is seeking to replicate a “leap frog” approach in energy similar to that used in telecommunications.Challenges for firms based in developed economiesNeed robust solutions yet very economical
Courtesy of GE Healthcare
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