CORPORATE LEVEL STRATEGY: HORIZONTAL & VERTICAL INTEGRATION; OUTSOURCING

1. CORPORATE LEVEL STRATEGY:HORIZONTAL & VERTICAL INTEGRATION; OUTSOURCING BUS 189 SPRING 2010 DR. MARK FRUIN

2. SCHEDULE • APRIL 13, CHAPTER 9 • APRIL 15, RETURN 2ND MIDS, RETURN PROJECT DRAFTS; DISTRIBUTE CASES 26 & 27 • APRIL 20, CHAPTER 10 • APRIL 22, DISTRIBUTE & DISCUSS CASES • Case 26: Michael Eisner’s Walt Disney Company • Case 27: The Walt Disney Company 1995-2009 • APRIL 27, CHAPTER 11 • APRIL 29, PREPARE THIRD MID-TERM; MORE DISCUSSION OF CASES 26 & 27 • MAY 4, THIRD MID-TERM; MAY 6, NO CLASS • MAY 11 & 13, GROUP PRESENTATIONS • MAY 20, LAST DAY FOR TURNING IN PROJECTS

3. CORPORATE-LEVEL STRATEGY • C-L STRATEGIES CREATE VALUE THROUGH MAXIMIZING FUNCTIONAL & BUSINESS LEVEL OPPORTUNITIES FOR THE FIRM AS-A-WHOLE • CHAPTER 9: HORIZONTAL & VERTICAL INTERGRATION, STRATEGIC OUTSOURCING • CHAPTER 10: RELATED & UNRELATED DIVERSIFICATION • CHAPTER 11: CORPORATE PERFORMANCE, GOVERNANCE & BUSINESS ETHICS

4. SINGLE INDUSTRY STRATEGIES • HORIZONTAL INTEGRATION: PREMIER SINGLE INDUSTRY STRATEGY • WHY? 1) FOCUS IN ONE AREA; 2) STICK TO WHAT ONE KNOWS BEST • BUT 1 INDUSTRY MAY HAVE MANY AREAS OF ACTIVITY • BANKING: RETAIL, WHOLESALE, INVESTMENT, REAL ESTATE • PRIMARY TOOLS OF H. I. ARE MERGERS & ACQUISITIONS • MERGER: AGREEMENT BETWEEN EQUALS TO POOL ASSETS, OPERATIONS & SHARE • ACQUISITION: USE OF CAPITAL RESOURCES - DEBT, STOCK & CASH - TO ACQUIRE ANOTHER COMPANY • RESULTS OF HORIZONTAL INTEGRATION • INCREASE CONCENTRATION; INCREASED MARKET POWER • TAKE OUT COMPETITION; REDUCE INDUSTRY RIVALRY • GAIN LOWER COST STRUCTURES • INCREASE (DECREASE) PRODUCT DIFFERENTIATION • MORE RESOURCES ALLOWS FIRM TO REPLICATE BUSINESS MODEL IN NEW LOCATIONS & SEGMENTS

5. PROBS W/ HORIZ. INEGRATION • DATA SUGGEST THAT IMPLEMENTING H. I. STRATEGIES IS PRETTY HARD TO DO WELL • KPMG STUDY OF 700 LARGE ACQUISITIONS • 31% REDUCE PROFITABILITY; DO NOT CREATE VALUE • 30% INCREASE PROFITABILITY OF ACQUIRING COMPANY • 29% HAVE LITTLE IMPACT • NO BETTER THAN A 1-IN-3 CHANCE OF MAKING MONEY • TYPICAL PROBLEMS • CULTURES CLASH • HIGH MANAGEMENT TURNOVER • OVERESTIMATION OF BENEFITS • ANTITRUST CONCERNS: DEPT OF JUSTICE (THE FEDS) • TOO MUCH CONCENTRATION & MARKET POWER • HOW MUCH IS TOO MUCH MAY BE HARD TO DETERMINE IN GLOBAL ECONOMY

6. VERTICAL INTEGRATION • VERTICAL INTEGRATION - A STRATEGY OF MOVING INTO NEW INDUSTRIES THAT ARE DIRECTLY RELATED TO CORE BUS • BACKWARD OR UPSTREAM VERTICAL INTEGRATION • BACKWARD TOWARDS SOURCES OF SUPPLY OF RAW MATERIALS OR INTERMEDIATE GOODS • WHY DO THIS? • FORWARD OR DOWNSTREAM VERTICAL INTEGRATION • FORWARD TOWARDS CUSTOMERS & THE MARKET • WHY DO THIS?

7. PROFITABILITY & V.I. • HOW TO CREATE VALUE & ADD PROFITS THROUGH VERTICAL INTEGRATION? • FACILITATE INVESTMENTS IN SPECIALIZED ASSETS • A “SPECIALIZED ASSET” IS DESIGNED TO PERFORM A SPECIFIC TASK; ITS VALUE IS GREATLY REDUCED IN ITS NEXT BEST USE • SAME MAKE OR BUY DECISION AS FIRM FACES IN ITS OWN INDUSTRY • RISK OF HOLDUP: IF CORE FIRM FEARS HOLDUP, ONLY TWO CHOICES: 1) STRENGTHEN PARTNERSHIP & DEVELOP TRUST, OR 2) TAKEOVER SPECIALIZED ASSET • ENHANCE PRODUCT QUALITY: IF YOU CAN’T GET THE QUALITY YOU WANT OR YOU’RE NOT WILLING TO ACCEPT THAT RISK, TAKEOVER SPEC. ASSETS • IMPROVE SCHEDULING & THROUGHPUT: STREAMLINE & GUARANTEE FLOWS & TIMING

8. PROBS W/ VERTICAL INTEGRATION • INCREASED COSTS/COST STRUCTURE • ACQUISITION COSTS • TRANSACTION COSTS • TRANSACTION COSTS ASSOCIATION W/ACQUISITION • TRANSACTION COSTS ASSOC. WITH BUREAUCRACY • HIGHER TRANSFER PRICES W/I COMPANY AFTER ACQUISITION; “CAPTURED CLIENT” SYNDROME • CHANGES IN TECHNOLOGY • MAY NOT UNDERSTAND DYNAMICS OF NEW INDUSTRY • MAY NOT BE WILLING TO MAKE NEEDED INVESTMENTS • DEMAND UNPREDICTABILITY • LOCKED INTO TRYING TO MAKE MONEY VIA ACQUISITION • ACQUIRED COMPANY MAY HAVE VARIOUS UNKNOWN PROBLEMS • EVEN DUE DILIGENCE MAY NOT BE ENOUGH

9. ALTERNATIVES TO V. I. • SHORT TERM CONTRACTS & COMPETITIVE BIDDING • THE PROBLEMS WITH MARKETS ARE VARIABLE COSTS & PROBLEMATIC SUPPLY, ESP SUPPLY THAT HINGES ON SPECIALIZED ASSETS • OF COURSE, THE ADVANTAGES OF MARKETS ARE LOW & COMPETITIVE PRICES • LONG TERM CONTRACTS & STRATEGIC ALLIANCES • STRATEGIC ALLIANCES ARE AGREEMENTS TO CO-SPECIALIZE ASSETS, BUT SEPARATE ENTITIES ARE NOT FORMED IN MOST INSTANCES, AS IN JOINT VENTURES • STRENGTHS OF S.A.: COSTS SHARED, CONTRACTUAL COMPLEXITIES MINIMIZED, MUTUAL RISK & REWARD • WEAKNESSES OF S.A.: NO CONTROL, BLEEDTHROUGH, LOSE MORE THAN GAIN • LONG TERM PARTNERSHIPS • HOSTAGE TAKING: SUBSTANTIAL, MUTUALLY DEPENDENT INVESTMENTS • CREDIBLE COMMITMENTS: WALKING THE TALK; TAKING ACTION • MAINTAIN “MARKET” DISCIPLINE: “DUAL” SOURCING; PARTNER EVALUATION AND REWARD

10. STRATEGIC OUTSOURCING • V. I. STRATEGIES CREATE VALUE ACROSS INDUSTRIES TO STRENGTHEN FIRMS’ CORE BUSINESSES • STRATEGIC OUTSOURCING IS A WAY OF REMOVING MANAGERIAL RESPONSIBILITIES FOR V. I. STRATEGIES • ENTIRE VALUE-CREATING ACTIVITIES THAT WERE PART OF A FIRM’S VALUE CHAIN ARE OUTSOURCED (REMOVED) TO OTHER COMPANIES • FULL VERSUS TAPERED INTEGRATION OF VALUE CHAIN ACTIVITIES: FULL INTEGRATION = IN-HOUSE; TAPERED INTEGRATION = IN-HOUSE + OUTSIDE SUPPLIERS • BENEFITS OF STRATEGIC OUTSOURCING • LOWER COSTS • CHEAPER, BETTER & FASTER • ENHANCED DIFFERENTATION; SUPPLIERS DO IT BETTER THAN WE DO • GREATER FOCUS ON CORE BUSINESS/CORE COMPETENCIES • RISKS OF OUTSOURCING • HOLDUP • LOSS OF CONTROL OVER STRATEGIC ACTIVITIES • LOSS OF INFORMATION

11. WHEN TO H.I., V.I. & S.O.? • THE QUESTION, AS ALWAYS, IS WHEN TO EXERCISE OR IMPLEMENT STRATEGIES • WHEN TO H.I.? • WHEN TO V.I.? • WHEN TO S.O.? • HOW LONG WILL IT TAKE TO SELECT & IMPLEMENT ANY OF THESE STRATEGIES • HOW LONG SHOULD A COMPANY WAIT BEFORE IT ASSESSES THE RESULTS OF ITS H.I., V.I. & S.O. STRATEGIES?

12. REMEMBER BASIC DEFINITION • STRATEGY IS WINNING: SUSTAINING SUPERIOR PERFORMANCE (PRESUMABLY BASED ON SUPERIOR COMPETITIVE ADVANTAGES) RELATIVE TO RIVALS IN THE SAME INDUSTRY