CORPORATE STRATEGY: HORIZONTAL & VERTICAL INTEGRATION, STRATEGIC OUTSOURCING BUSINESS 189SPRING 2007DR. MARK FRUIN

CORPORATE STRATEGYNOT BUSINESS LINE STRATEGY or PRODUCTS/PLATFORMS/MARKETSCHOICES FIRMS MAKE WHEN PURSUING MULTI-BUSINESS STRATEGYCHOICES SHOULD ADD VALUEEITHER CREATE MORE VALUE AT LOWER COSTOR ENABLE SUPERIOR DIFFERENTIATION THAT BRINGS PREMIUM PRICINGBUT GO BEYOND GENERIC STRATEGIES, IF POSSIBLEGOING BEYOND OFTEN CHARACTERIZED AS SYNERGY; MORE THAN SUM OF THE PARTS

LOOKING UP OR DOWN?TRADITIONALLY, THE ARGUMENT HAS BEEN THE CORPORATE-LEVEL STRATEGY SETS THE CONTEXT FOR BUSINESS-LEVEL STRATEGYALTERNATIVELY, LOOK UPWARD AND SAY THAT BUSINESS-LEVEL STRATEGY SHOULD SET THE CONTEXT FOR CORPORATE-LEVEL STRATEGYWHICH IS RIGHT IN YOUR OPINION?

FROM THE RBV PERSPECTIVEIT MAKES SENSE TO SAY THAT BUSINESS-LEVEL STRATEGIES SET THE CONTEXT FOR CORP-LEVEL STRATBECAUSE ASSET SPECIFICITY AND THE STICKINESS OF RESOURCES MAKE THEM HARD TO LEVERAGE BROADLY UNFORTUNATELY, CORP EXECUTIVES OFTEN THINK THAT THEY CAN MOBILIZE RESOURCES EFFECTIVELYI can manage anything point of viewGeneral management as opposed to specific skills

CORPORATE STRATEGY SHOULDESTABLISH DISTINCTIVE COMPETENCIES AND COMPETITIVE ADVANTAGES AT MULTIPLE BUSINESS LEVELSTYPOLOGY OF FIRM-TYPESSINGLE PRODUCT FIRM (>80% OF SALES)DOMINANT PRODUCT FIRM (>60%)RELATED PRODUCT FIRMRELATED IN TERMS OF TECHNOLOGYRELATED IN TERMS OF MARKETUNRELATED PRODUCT FIRM (conglomerate)UNRELATED BY DESIGN OR BY TIME?

DIFFERENTIATION VS DIVERSIFICATIONOFTEN HARD TO DISTINGUISHFROM THE RBV, DIFFERENTIATION CAN BE ACCOMPLISHED ON THE BASIS OF EXISTING RESOURCES & CAPABILITIES (ALTHOUGH THEY BE USED IN NEW WAYS)DIVERSIFICATION REQUIRES NEW RESOURCES & CAPABILITIESAUTO MAKER MOVES INTO AUTO PARTSDIFFERENTIATION OR DIVERSIFICATION?

DIVERSIFICATIONMEANS NOT STICKING TO THE KNITTINGHORIZONTAL INTEGRATION VS VERTICAL INTEGRATION:WHATS THE DIFFERENCE?WHATS THE LOGIC?WHATS THE LIKELY OUTCOME?

HORIZONTAL INTEGRATIONMERGER WITH & ACQUISITION OF FIRMS IN THE SAME INDUSTRYHOW TO DEFINE INDUSTRY BOUNDARIESIS IBM GLOBAL SERVICES SAME INDUSTRY AS IBM? IBM HARDWARE? IBM SOFTWARE?IS APPLE SAME INDUSTRY AS HP/COMPAQ?USUALLY (IN PAST) HORIZONTAL INTEGRATION PRECEDES VERTICAL INTEGRATION - WHY?RECENT EXAMPLES: DAIMLER BENZ BUYS CHRYSLER; BOEING BUYS MCDONALD DOUGLAS; HP BUYS COMPAQA GOOD THING? HOW ADD VALUE?

HORIZONTAL INTEGRATIONTEXT SAYS ADVANTAGES OF HORIZONTAL INTEGRATION AREREDUCED COSTSINCREASED VALUE THROUGH DIFFERENTIATION PRODUCT BUNDLINGTOTAL SOLUTION SELLINGCROSS SELLING (FINANCIAL SUPERMARKET)STRATEGIES IN MATURE INDUSTRIESMANAGED RIVALRYELMINATE EXCESS CAPACITYPRICE COORDINATIONINCREASED BARGAINING (MARKET) POWER

HORIZONTAL INTEGRATION PROBLEMSPAY TOO MUCH UP-FRONTREALIZE TOO LITTLE ON BACK ENDHARD TO MERGE RESOURCES, CAPABILITIES & CULTURES OF DIFFERENT FIRMS (EVEN WITHIN SAME INDUSTRY)ANTITRUST CONCERNSRISKS INCREASING OR DECREASING?WHAT SORT OF RISK? MKT/ORG/TECH

VERTICAL INTEGRATIONBACKWARD OR UPSTREAM INTEGRATION MEANS BUYING YOUR OWN INPUTSDOWNSTREAM OR FORWARD INTEGRATION MEANS DISPOSING OF ONES OUTPUTSHISTORICALLY, V.I. CAME AFTER H.I. IN THE UNITED STATES: DUPONT, GM, GECURRENT SUPPLY CHAIN STRATEGIES ARE MOSTLY VERTICAL INTEGRATION STRATEGIESFULL VERSUS TAPER INTEGRATION

VALUE CHAINTHE STAGES OF RESOURCE CONVERSION FROM INPUTS TO OUTPUTSVALUE CHAIN IS A CHOICE ABOUT HOW MANY STAGES OF RESOURCE CONVERSION (VERTICAL INTEGRATION) TO DO INTERNALLYTHE TRADITIONAL LOGIC IS: LESS EXPENSIVE TO DO IT ONESELFMARKETS VS HIERARCHIES DEBATEOPPORTUNISM AND BOUNDED RATIONALITYSTABILITY & ACCESS TO MARKETS VARYIT CAN LOWER COSTS OF HIERARCHY

WHEN DOES IT MAKE SENSE TO VERTICALLY INTEGRATE?WHEN UNIQUE RESOURCES AVAILABLEDISTINCTIVE COMPETENCIES MAY BE BASED ON HAVING THE RIGHT, LIMITED RESOURCE/SWHEN IT IS HARD TO FIND SPECIALIZED ASSETS NEEDED IN ADJACENT STAGESRISK OF HOLDUPRISK OF QUALITY PROBLEMSPROTECT/LEVERAGE MARKET POSITIONIMPROVE SCHEDULING/TIME TO MARKET

FULL VS PARTIAL (TAPERED) VERTICAL INTEGRATIONTAPERED INTEGRATION OCCURS WHEN FIRMS BUY FROM INDEPENDENT SUPPLIERS IN ADDITION TO SELF-SUPPLYWHY DO THIS?SECURE ALTERNATIVE SOURCES OF SUPPLYCOMPARATIVE COST CONTROLSUNDERSTAND NATURE OF ASSET SPECIFICITYPROTECT KEY RESOURCES/CAPABILITIES

DISADVANTAGES OF VERTICAL INTEGRATIONITS COSTLYBEST USE OF FUNDS?NARROWS RANGE OF CHOICES/SOURCES AVAILABLE TO FIRMMAY REDUCE INNOVATION MAY NOT LEVERAGE RESOURCES EFFECTIVELY BECAUSE OFBUREAUCRATISMLOSS OF MOTIVATIONUNDER- OR OVER-SUPPLY OF INPUTS (DEMAND MANAGEMENT)

ALTERNATIVES TO VERTICAL BUT NOT HORIZONTAL INTEGRPARTNERSHIPSSHORT-TERM CONTRACTS & COMPETITIVE BIDDINGJOINT VENTURESSTRATEGIC ALLIANCESSTRATEGIC OUTSOURCINGRELATIONAL CONTRACTINGRELATIONSHIP-BASED PRICING/GOODWILLSUPPLIER MANAGEMENT STRATEGIESINTERFIRM NETWORK STRATEGIESA LA JAPANESE (BUT NOT US) AUTO & ELECTRONICS FIRMS

OUTSOURCING BENEFITSREDUCE COSTS & CERTAIN RISKSSPEED OF OPERATIONSIMPROVED FOCUSINNOVATION ENHANCED & ACCELERATEDIMPROVE PRODUCT DIFFERENTIATIONEFFICIENCYQUALITYENHANCED CUSTOMER SATISFACTIONBESIDES FUNCTIONAL STRATS, BETTER LB STRATS: PRODUCT & MKT DEVELOPMENT, PROLIFERATION, ETC.

OUTSOURCING DRAWBACKSTHINKING PROBLEMS HAVE GONE AWAYHOLDUPSCHEDULING & INTEGRATION PROBLEMS (COORDINATION & TRANSACTION COSTS)DISPUTE RESOLUTION NOT SIMPLELOSS OF INFORMATION & POTENTIAL PROPRIETARY KNOWHOWLINKAGE-BASED KNOWHOW OFTEN LOST (VALUE CHAIN BASED ON LINKED ACTIVITIES)

CL STRAT AS COOPERATIONHORIZONTAL & VERTICAL INTEGRATION STRATEGIES ARE COOPERATIVE STRATEGIES SECURED BY OWNERSHIP NIELSEN PORTERPOOLINGSHARING ACTIVITIESEXCHANGETRANSFER SKILLS/ FINANCIAL MANAGEMENTCOMPL. SPECIAL- RESTRUCTURING IZATIONEXPERIMENT & WITHDRAWAL

ALTERNATIVES TO C-L STRATEGIESCONGLOMERATE (A KIND OF UNRELATED C-L STRATEGY)BUSINESS GROUP (WITH OR WITHOUT HOLDING COMPANY CONTROL)CHOOSE RIGHT INDUSTRIAL DISTRICTSSTRONG NETWORKLOOSE NETWORK

COOPERATION SECURED & UNSECURED BY OWNERSHIPCL STRATEGIES ARE GENERALLY SECURED BY OWNERSHIPNETWORK-BASED STRATEGIES ARE OFTEN NOT SECURED BY OWNERSHIPWHY THE DIFFERENCE?TIMING OF COOPERATION; DOWNSTREAM COOP IS MORE DIFFICULT THAN UPSTREAMCATCH-UP OR NOTSPEED OF COOP ACTIVITIESALTERNATIVE SOURCES OF POWER/GOVERNANCECOMPLEXITY OF INTERACTIVE ROUTINESIMITATIONOF ACTIONS DOES NOT REQUIRE DUPLICATION OF MEANS

NETWORK ALTERNATIVESTOYOTA GROUPABOUT 10% OF 1ST TIER FIRMS HAVE TOYOTA INVESTM.COORDINATE THRU TPS/JITORGANIZATIONAL PROPERTY RIGHTSHIERARCHICAL NETWORK WITH MANY SUB-SYSTEMSSUNS JAVA & JINISUN NOT INVEST IN DEVELOPERSSUN RETAINS OS PROPERTY RIGHTSEVERYTHING ELSE FAIR GAMESCALE-FREE NETWORK WITH LOTS OF SELF-ORGANIZING & REDUNDANCY