corporate strategy: horizontal & vertical integration, strategic outsourcing business 189 spring...
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CORPORATE STRATEGY: HORIZONTAL & VERTICAL INTEGRATION, STRATEGIC
OUTSOURCING
BUSINESS 189
SPRING 2007
DR. MARK FRUIN
CORPORATE STRATEGY• NOT BUSINESS LINE STRATEGY or
PRODUCTS/PLATFORMS/MARKETS• CHOICES FIRMS MAKE WHEN PURSUING
MULTI-BUSINESS STRATEGY• CHOICES SHOULD ADD VALUE
– EITHER CREATE MORE VALUE AT LOWER COST– OR ENABLE SUPERIOR DIFFERENTIATION THAT
BRINGS PREMIUM PRICING– BUT GO BEYOND GENERIC STRATEGIES, IF POSSIBLE– GOING 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 STRATEGY
• ALTERNATIVELY, LOOK UPWARD AND SAY THAT BUSINESS-LEVEL STRATEGY SHOULD SET THE CONTEXT FOR CORPORATE-LEVEL STRATEGY
• WHICH IS RIGHT IN YOUR OPINION?
FROM THE RBV PERSPECTIVE• IT MAKES SENSE TO SAY THAT
BUSINESS-LEVEL STRATEGIES SET THE CONTEXT FOR CORP-LEVEL STRAT
• BECAUSE ASSET SPECIFICITY AND THE STICKINESS OF RESOURCES MAKE THEM HARD TO LEVERAGE BROADLY
• UNFORTUNATELY, CORP EXECUTIVES OFTEN THINK THAT THEY CAN MOBILIZE RESOURCES EFFECTIVELY– “I can manage anything” point of view– General management as opposed to specific skills
CORPORATE STRATEGY SHOULD
• ESTABLISH DISTINCTIVE COMPETENCIES AND COMPETITIVE ADVANTAGES AT MULTIPLE BUSINESS LEVELS
• TYPOLOGY OF FIRM-TYPES– SINGLE PRODUCT FIRM (>80% OF SALES)– DOMINANT PRODUCT FIRM (>60%)– RELATED PRODUCT FIRM
• RELATED IN TERMS OF TECHNOLOGY• RELATED IN TERMS OF MARKET
– UNRELATED PRODUCT FIRM (conglomerate)• UNRELATED BY DESIGN OR BY TIME?
DIFFERENTIATION VS DIVERSIFICATION
• OFTEN HARD TO DISTINGUISH• FROM THE RBV, DIFFERENTIATION CAN BE
ACCOMPLISHED ON THE BASIS OF EXISTING RESOURCES & CAPABILITIES (ALTHOUGH THEY BE USED IN NEW WAYS)
• DIVERSIFICATION REQUIRES NEW RESOURCES & CAPABILITIES
• AUTO MAKER MOVES INTO AUTO PARTS– DIFFERENTIATION OR DIVERSIFICATION?
DIVERSIFICATION
• MEANS “NOT STICKING TO THE KNITTING”
• HORIZONTAL INTEGRATION VS VERTICAL INTEGRATION:– WHAT’S THE DIFFERENCE?– WHAT’S THE LOGIC?– WHAT’S THE LIKELY OUTCOME?
HORIZONTAL INTEGRATION• MERGER WITH & ACQUISITION OF FIRMS IN THE
SAME INDUSTRY– HOW TO DEFINE INDUSTRY BOUNDARIES– IS 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 COMPAQ– A GOOD THING? HOW ADD VALUE?
HORIZONTAL INTEGRATION• TEXT SAYS ADVANTAGES OF
HORIZONTAL INTEGRATION ARE– REDUCED COSTS– INCREASED VALUE THROUGH
DIFFERENTIATION • PRODUCT BUNDLING• TOTAL SOLUTION SELLING• CROSS SELLING (FINANCIAL SUPERMARKET)• STRATEGIES IN MATURE INDUSTRIES
– MANAGED RIVALRY• ELMINATE EXCESS CAPACITY• PRICE COORDINATION
– INCREASED BARGAINING (MARKET) POWER
HORIZONTAL INTEGRATION PROBLEMS
• PAY TOO MUCH UP-FRONT• REALIZE TOO LITTLE ON BACK END• HARD TO MERGE RESOURCES,
CAPABILITIES & CULTURES OF DIFFERENT FIRMS (EVEN WITHIN SAME INDUSTRY)
• ANTITRUST CONCERNS• RISKS INCREASING OR DECREASING?
– WHAT SORT OF RISK? MKT/ORG/TECH
VERTICAL INTEGRATION• BACKWARD OR UPSTREAM INTEGRATION
MEANS BUYING YOUR OWN INPUTS• DOWNSTREAM OR FORWARD INTEGRATION
MEANS DISPOSING OF ONES’ OUTPUTS• HISTORICALLY, V.I. CAME AFTER H.I. IN THE
UNITED STATES: DUPONT, GM, GE• CURRENT SUPPLY CHAIN STRATEGIES ARE
MOSTLY VERTICAL INTEGRATION STRATEGIES• FULL VERSUS TAPER INTEGRATION
VALUE CHAIN
• THE STAGES OF RESOURCE CONVERSION FROM INPUTS TO OUTPUTS
• VALUE CHAIN IS A CHOICE ABOUT HOW MANY STAGES OF RESOURCE CONVERSION (VERTICAL INTEGRATION) TO DO INTERNALLY
• THE TRADITIONAL LOGIC IS: LESS EXPENSIVE TO DO IT ONESELF– MARKETS VS HIERARCHIES DEBATE– OPPORTUNISM AND BOUNDED RATIONALITY– STABILITY & ACCESS TO MARKETS VARY– IT CAN LOWER COSTS OF HIERARCHY
WHEN DOES IT MAKE SENSE TO VERTICALLY INTEGRATE?
• WHEN “UNIQUE” RESOURCES AVAILABLE– DISTINCTIVE COMPETENCIES MAY BE BASED ON
HAVING THE “RIGHT”, LIMITED RESOURCE/S
• WHEN IT IS HARD TO FIND SPECIALIZED ASSETS NEEDED IN ADJACENT STAGES– RISK OF HOLDUP– RISK OF QUALITY PROBLEMS
• PROTECT/LEVERAGE MARKET POSITION• IMPROVE SCHEDULING/TIME TO MARKET
FULL VS PARTIAL (TAPERED) VERTICAL INTEGRATION
• TAPERED INTEGRATION OCCURS WHEN FIRMS BUY FROM INDEPENDENT SUPPLIERS IN ADDITION TO SELF-SUPPLY
• WHY DO THIS?– SECURE ALTERNATIVE SOURCES OF SUPPLY– COMPARATIVE COST CONTROLS– UNDERSTAND NATURE OF ASSET SPECIFICITY– PROTECT KEY RESOURCES/CAPABILITIES
DISADVANTAGES OF VERTICAL INTEGRATION
• IT’S COSTLY• BEST USE OF FUNDS?• NARROWS RANGE OF CHOICES/SOURCES
AVAILABLE TO FIRM• MAY REDUCE INNOVATION • MAY NOT LEVERAGE RESOURCES
EFFECTIVELY BECAUSE OF– BUREAUCRATISM– LOSS OF MOTIVATION– UNDER- OR OVER-SUPPLY OF INPUTS
(DEMAND MANAGEMENT)
ALTERNATIVES TO VERTICAL BUT NOT HORIZONTAL INTEGR• PARTNERSHIPS
– SHORT-TERM CONTRACTS & COMPETITIVE BIDDING
– JOINT VENTURES– STRATEGIC ALLIANCES
• STRATEGIC OUTSOURCING
– RELATIONAL CONTRACTING• RELATIONSHIP-BASED PRICING/GOODWILL
– SUPPLIER MANAGEMENT STRATEGIES– INTERFIRM NETWORK STRATEGIES
• A LA JAPANESE (BUT NOT US) AUTO & ELECTRONICS FIRMS
OUTSOURCING BENEFITS• REDUCE COSTS & CERTAIN RISKS• SPEED OF OPERATIONS• IMPROVED FOCUS• INNOVATION ENHANCED & ACCELERATED• IMPROVE PRODUCT DIFFERENTIATION
– EFFICIENCY
– QUALITY
– ENHANCED CUSTOMER SATISFACTION
– BESIDES FUNCTIONAL STRATS, BETTER LB STRATS: PRODUCT & MKT DEVELOPMENT, PROLIFERATION, ETC.
OUTSOURCING DRAWBACKS• THINKING PROBLEMS HAVE GONE AWAY• HOLDUP• SCHEDULING & INTEGRATION PROBLEMS
(COORDINATION & TRANSACTION COSTS)• DISPUTE RESOLUTION NOT SIMPLE• LOSS OF INFORMATION & POTENTIAL
PROPRIETARY KNOWHOW• LINKAGE-BASED KNOWHOW OFTEN LOST
(VALUE CHAIN BASED ON LINKED ACTIVITIES)
CL STRAT AS COOPERATION• HORIZONTAL & VERTICAL INTEGRATION
STRATEGIES ARE COOPERATIVE STRATEGIES SECURED BY OWNERSHIP
• NIELSEN PORTER– POOLING SHARING ACTIVITIES– EXCHANGE TRANSFER SKILLS/ FINANCIAL MANAGEMENT– COMPL. SPECIAL- RESTRUCTURING
IZATION– EXPERIMENT & WITHDRAWAL
ALTERNATIVES TO C-L STRATEGIES
• CONGLOMERATE (A KIND OF UNRELATED C-L STRATEGY)
• BUSINESS GROUP (WITH OR WITHOUT HOLDING COMPANY CONTROL)
• CHOOSE “RIGHT” INDUSTRIAL DISTRICTS• STRONG NETWORK• LOOSE NETWORK
COOPERATION SECURED & UNSECURED BY OWNERSHIP
• CL STRATEGIES ARE GENERALLY SECURED BY OWNERSHIP
• NETWORK-BASED STRATEGIES ARE OFTEN NOT SECURED BY OWNERSHIP
• WHY THE DIFFERENCE?– TIMING OF COOPERATION; DOWNSTREAM COOP IS
MORE DIFFICULT THAN UPSTREAM– CATCH-UP OR NOT– SPEED OF COOP ACTIVITIES– ALTERNATIVE SOURCES OF POWER/GOVERNANCE– COMPLEXITY OF INTERACTIVE ROUTINES– IMITATIONOF ACTIONS DOES NOT REQUIRE
DUPLICATION OF MEANS
NETWORK ALTERNATIVES
• TOYOTA GROUP
• ABOUT 10% OF 1ST TIER FIRMS HAVE TOYOTA INVESTM.
• COORDINATE THRU TPS/JIT
• ORGANIZATIONAL PROPERTY RIGHTS
• HIERARCHICAL NETWORK WITH MANY SUB-SYSTEMS
• SUN’S JAVA & JINI• SUN NOT INVEST IN
DEVELOPERS• SUN RETAINS OS
PROPERTY RIGHTS• EVERYTHING ELSE
FAIR GAME• SCALE-FREE
NETWORK WITH LOTS OF SELF-ORGANIZING & REDUNDANCY