Strategic Management - Chapter 9: Corporate-Level Strategy, Horizontal Integration, Vertical Integration, and Strategic Outsourcing

How does horizontal integration lower cost structure?

1) Creates economies of scale 2) Reduces duplication of resources

In general, corporate-level strategy involves what choices by strategic managers?

1) Deciding in which businesses and industries a company should compete 2) Selecting which value creation activities it should perform in those businesses 3) Determining how it should enter, consolidate, or exit businesses or industries to maximize long-term profitability

What are the three main ways in which we increase profitability through vertical integration?

1) Facilitating investments in specialized assets 2) Enhancing product quality 3) Improved scheduling

What are the problems with horizontal mergers?

1) Failed acquisition due to culture, mismanagement, underestimation of problems, etc 2) Potential antitrust/DOJ issues

What are the disadvantages of outsourcing?

1) Holdup 2) Increased competition - We pay to push CMOs down their learning curve, and they could eventually become competition 3) Loss of information and forfeited learning opportunities

What are the ways in which companies can ensure that they are not taking advantage of when building long-term relationships?

1) Hostage taking - exchanging of valuable resources to guarantee that each partner will keep its side of the bargain 2) Credible commitments - A believable promise or pledge 3) Maintaining market discipline - the ability to renegotiate contracts on a set schedule, and a parallel sourcing strategy where two suppliers are listed for the same component

What are the three main problems with vertical integration?

1) Increasing cost structure 2) Disadvantages that arise when technology is changing fast 3) Disadvantages that arise when demand is unpredictable

How does horizontal integration increase product differentiation?

1) Increasing the flow of innovative products (e.g., Eli Lily buying another drug company) 2) Product bundling 3) Cross-selling

What are the benefits of outsourcing?

1) Lower cost structure 2) Enhanced differentiation 3) Focus on the Core Business

What are the general benefits of horizontal integration?

1) Lower cost structure 2) Increased product differentiation 3) Leveraging a competitive advantage more broadly 4) Reduced industry rivalry 5) Increased bargaining power

How does horizontal integration reduce rivalry?

1) Merging or acquiring competitors eliminates excess capacity, reducing the likelihood of price wars 2) By reducing the number of competitors, tacit price coordination becomes easier.

What are the general alternatives to vertical integration?

1) Short term contracts and competitive bidding 2) Strategic alliances and long-term contracting 3) Building long-term cooperative relationships

Corporate level strategy should enable a company to do what two things?

1) perform value chain functional activities at a lower cost and/or 2) in a way that results in increased differentiation

What is a merger?

An agreement between two companies to pool their resources and operations and join together to better compete in a business or industry

How do specialized assets lead to vertical integration?

Company has a unique demand that can only be met with specialized investments --> Suppliers cannot make this investment if ONE company is the only buyer --> Company cannot afford to be entirely dependent on this one supplier --> leads to MUTUAL DEPENDENCE as it could lead to a risk of a holdup

How could vertical integration increase cost structure?

Company-owned subsidiaries have no real incentive to control their costs, captive audience. They pass on higher transfer prices

How does vertical integration improve scheduling?

Control over inputs allows JIT inventory (Example: Ford owned iron mines in upper Michigan. Controlled the supply chain so tightly that iron ore was unloaded at Ford's steel foundries on the great lakes and was turned into engine blocks within 24 hours)

How can vertical integration lead to enhancing product quality?

Control, control, control

What are bureaucratic costs?

Costs of solving transaction difficulties that arise from managerial inefficiencies and the need to manage the handoffs and exchanges between business units to promote increased differentiation, or to lower a company's cost structure.

How can demand unpredictabillity become a problem in vertical integration?

Firms will find themselves locked into a high cost structure if demand plummets

How can we generalize the concept of how specialized assets lead to vertifical integration?

If achieving a competitive advantage requires one company to make investments in specialized assets to serve another, risk of holdup serves as a deterrent, and the investment may not take place, and the opportunity for higher profitability may be lost. To prevent this, we vertically integrate.

What is a competitive bidding strategy?

Independent component suppliers compete to be chosen to supply a particular product, made to agreed-upon specifications

What are strategic alliances?

Long-term agreements between two or more companies to jointly develop new products or processes that benefit all companies that are a part of the agreement.

What is product bundling?

Offering customers the opportunity to purchase a range of products at a single, combined price; this increases the value of a company's product line because customers often obtain a price discount when a purchasing a set of products at one time, and customers become used to dealing with only one company and its representatives

What is a specialized asset?

One that is designed to perform a specific task and the value of which is significantly reduced in its next-best use --> Allow companies to differentiate themselves and lower their cost structure

How can technological change become a problem in vertical integration?

The acquisitions can lock companies into old, inefficient technology that they then need to divest.

What is strategic outsourcing?

The decision to allow one or more of a company's value-chain activities to be performed by independent, specialist companies that focus all their skills and knowledge on just one kind of activity to increase performance

What is transfer pricing?

The price that one division of a company charges another division for its products, which are the inputs the other division requires to manufacture its own products.

What is horizontal integration?

The process of acquiring or merging with industry competitors to achieve the competitive advantages that arise from a large size and scope of operations

What is quasi integration?

The use of long-term relationships, or some investments in some activities normally performed by suppliers or buyers, in place of full ownership of operations that are backward or forward in the supply chain

What is the principal goal of corporate-level strategy?

To enable a company to sustain or promote its competitive advantage and profitability in its present business - and in any new businesses or industries that it chooses to enter.

What is vertical integration?

When a company expands its operations either backwards into an industry that produces inputs for the company's core products (backward vertical integration) or forward into an industry that uses, distributes, or sells the company's products (forward vertical integration).

What is a holdup?

When a company is taken advantage of by another company it does business with after it has made an investment in expensive specialized assets to better meet the needs of the other company

What is cross-selling?

When a company takes advantage of or leverages its established relationship with customers by way of acquiring additional product lines or categories that it can sell to them. In this way, a company increases differentiation because it can provide a "total solution" and satisfy all of a customer's specific needs

What is an acquisition?

When a company uses its capital resources to purchase another company

What is tapered integration?

When a firm uses a mix of vertical integration and market transactions for a given input. For example, a firm might operate limited semiconductor manufacturing while also buying semiconductor chips on the market. Doing so helps to prevent supplier holdup (because the firm can credibly commit to not buying from external suppliers) and increases its ability to judge the quality and cost of purchased supplies.

What is a virtual corporation?

When companies pursued extensive strategic outsourcing to the extent that they only perform the central value creation functions that lead to competitive advantage

Horizontal integration will allow a firm to have increased _______________________

bargaining power