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8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Corporate Strategy: Strategy: Vertical Vertical Integration and Integration and Diversification Diversification Instructor: Dr.Gehan Shanmuganathan

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Page 1: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

8CHAPTER

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Corporate Strategy: Corporate Strategy: Vertical Integration Vertical Integration and Diversificationand Diversification

Instructor:Dr.Gehan Shanmuganathan

Page 2: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

Part 2 Strategy Formulation

8-2

Page 3: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

LO 8-1 Define corporate-level strategy, and describe the three dimensions along which it is assessed.

LO 8-2 Describe and evaluate different options firms have to organize economic activity.

LO 8-3 Describe two types of vertical integration along the industry value chain: backward and forward vertical integration.

LO 8-4 Identify and evaluate benefits and risks of vertical integration.

LO 8-5 Describe and examine alternatives to vertical integration.

LO 8-6 Describe and evaluate different types of corporate diversification.

LO 8-7 Apply the core competence – market matrix to derive different diversification strategies.

LO 8-8 Explain when a diversification strategy creates a competitive advantage, and when it does not.

8-3

Page 4: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

ChapterCase 8 ChapterCase 8 Refocusing GE: A Future of Clean-Tech and Health Care?Refocusing GE: A Future of Clean-Tech and Health Care?

• Jeffrey Immelt appointed CEO of GE Sept. 7Jeffrey Immelt appointed CEO of GE Sept. 7thth 2001 2001

Environmental Change (e.g., 9/11 and Global Financial Crises)Environmental Change (e.g., 9/11 and Global Financial Crises)

GE’s stock price fell by 84% GE’s stock price fell by 84%

Lost AAA credit ratingLost AAA credit rating

• Refocus on green economy and health care industriesRefocus on green economy and health care industries

Sold majority stake in NBC Universal to ComcastSold majority stake in NBC Universal to Comcast

• ecomaginationecomagination: solar energy, hybrid locomotives, fuel cells…etc.: solar energy, hybrid locomotives, fuel cells…etc.

• healthymaginationhealthymagination: increase quality and access to health care: increase quality and access to health care

8-4

Page 5: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

What Is Corporate Strategy?What Is Corporate Strategy?

• Corporate strategyCorporate strategy

Quest for competitive advantage when competing in multiple Quest for competitive advantage when competing in multiple

industriesindustries

Ex: Jeffrey Immelt’s initiative in clean-tech and health care industriesEx: Jeffrey Immelt’s initiative in clean-tech and health care industries

• Corporate strategy concerns the scope of the firmCorporate strategy concerns the scope of the firm

Industry value chainIndustry value chain

Products and servicesProducts and services

Geography Geography

8-5

Page 6: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

What Is Corporate Strategy? (cont'd)

• Economies of scale Average per-unit cost decreases as its output

increases Ex: Anheuser-Busch Inbev largest global brewer

• Economies of scope Savings that come from producing more outputs or

providing different services at less cost Ex: Amazon range of products & services

• Transaction cost The cost associated with economic exchange

"Make or buy" decision

8-6

Page 7: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

Transaction Cost Economics and Scope of the Firm• Transaction cost economicsTransaction cost economics

Explains and predicts the Explains and predicts the scopescope of the firm of the firm "Market vs. firms" have differential costs"Market vs. firms" have differential costs

• Transaction costsTransaction costs Costs associated with economic exchangesCosts associated with economic exchanges

Either in the firm OR in the marketsEither in the firm OR in the markets Ex: negotiating and enforcing contractsEx: negotiating and enforcing contracts

• Administrative costsAdministrative costs Costs pertaining to organizing an exchange within a Costs pertaining to organizing an exchange within a

hierarchyhierarchy Ex: recruiting & training employeesEx: recruiting & training employees

8-7

Page 8: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

1–8

STRATEGY HIGHLIGHT 8.1STRATEGY HIGHLIGHT 8.1 Toyota Locks Up Lithium for Car Batteries

• World demand for lithium-ion batteries for carsWorld demand for lithium-ion batteries for cars

Grow from $278 million in ‘09 to Grow from $278 million in ‘09 to $25 billion$25 billion in 2014 in 2014• Toyota wants to secure long-term supply of lithium to Toyota wants to secure long-term supply of lithium to

power its hybrid fleetpower its hybrid fleet

• Orocobre holds exploration rights to a large salt-lake areaOrocobre holds exploration rights to a large salt-lake area

Upfront investment to extract of lithium is very highUpfront investment to extract of lithium is very high

• Should Orocobre make the investment to supply Toyota?Should Orocobre make the investment to supply Toyota?

To encourage investment, Toyota took an To encourage investment, Toyota took an equity equity

positionposition

China Rare Earth Video

8-8

http://video.nytimes.com/video/2010/11/11/world/asia/1248069298846/china-halts-shipments-of-rare-earths.html?scp=1&sq=rare%20earth&st=cse
Page 9: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

Vertical Integration along the Industry Value Chain

• In what stages of the industry value chain should the firm participate?

• Vertical integration Ownership of its inputs, production, & outputs in the

value chain Horizontal value chain

Internal, firm-level value chains (Chapter 4)

• Vertical value chain Industry-level integration from upstream to

downstream Examples: cell phone industry value chain

• Many different industries and firms

8-9

Page 10: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

EXHIBIT 8.5EXHIBIT 8.5 HTC’s Backward and Forward Integration along the Industry Value Chain in the Smartphone Industry

8-10

Page 11: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

Types of Corporate Diversification

• Single business Google

• Dominant business Microsoft

• Related diversification Related constrained

ExxonMobil

Related linked Disney

• Unrelated diversification GE

8-11

Page 12: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

Leveraging Core Competencies for Corporate Diversification

• Core competence Unique skills and strengths Allows firms to increase the value of product/service Lowers the cost

• Examples: Walmart – global supply chain Infosys – low-cost global delivery system

• The core competence – market matrix Provides guidance to executives on how to diversify

in order to achieve continued growth

8-12

Page 13: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

Corporate Diversification

• Boston Consulting Group (BCG):

growth-share matrix

Question marks

Dogs

Stars

Cash cows

8-13

Page 14: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

Corporate Strategy: Combining Vertical Integration and Diversification

• Firms’ corporate strategy Concerns level of integration on value chain

AND Level of diversification

Ex: Oracle earned $23B in 2009 Enterprise software is core competency

– Backward integration – Sun Microsystems– Forward integration – PeopleSoft

Diversification at Oracle: – Related – IP management bought Sophoi– Unrelated – ID theft bought Bharosa

8-14

Page 15: 8 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy: Vertical Integration and Diversification

CHAPTERCASE 8/ CHAPTERCASE 8/ Consider This…Consider This…1. Where do ecomagination and healthymagination fit on

the core competence – market matrix for GE?

2. Take either the energy or health care industry and draw the industry value chain. What areas of potential vertical integration should GE consider?

3. What related diversification would you suggest for GE in reference to its focus for the future?

4. How do GE’s corporate-level strategic initiatives of energy, health care, and globalization reinforce each other? How might they generate conflicts in the company?

8-15


McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill

Correlated to Macmillan/McGraw-Hill€¦ · Mondo Bookshop - Grade K correlated to Macmillan/McGraw-Hill Treasures. Mondo Bookshop Macmillan/McGraw-Hill Treasures. Mondo Macmillan/McGraw-Hill

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