corporate strategy: horizontal & vertical integration, strategic outsourcing business 189 spring...

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