CORPORATE STRATEGY: HORIZONTAL & VERTICAL INTEGRATION, STRATEGIC OUTSOURCING

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

2. 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

3. 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?

4. 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

5. 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?

6. 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?

7. 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?

8. 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?

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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)

16. 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

17. 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.

18. 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)

19. 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

20. 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

21. 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

22. 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 NETWORK ALTERNATIVES