Chapter Nine

Corporate
Strategy:
Horizontal
Integration,
Vertical
Integration,
and Strategic
Outsourcing
 Corporate-Level Strategy
Corporate-Level Strategy should allow a company, or its
business units, to perform the value-creation functions at lower
cost or in a way that allows for differentiation and premium price.
Corporate strategy is used to identify:
1. Businesses or industries that the company should
compete in
2. Value creation activities that the company should
perform in those businesses
3. Method to enter or leave businesses or industries
in order to maximize its long-run profitability
Companies must adopt a long-term perspective
Consider how changes in the industry and its products,
technology, customers, and competitors will affect its
current business model and future strategies.
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 Corporate-Level Strategy:
The Multi-Business Model
A company’s corporate-level strategies
should be chosen to promote the success of
a company’s business model – and to allow
it to achieve a sustainable competitive
advantage at the business level.
A multi-business company must construct its
business model at two levels:
1. Business models and strategies
for each business unit or division in every industry in
which it competes
2. Higher-level multi-business model
that justifies its entry into different businesses and
industries
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 Repositioning and Redefining
A Company’s Business Model
Corporate-level strategies are primarily directed
toward improving a company’s competitive advantage
and profitability in its present business or product line:
 Horizontal Integration
• The process of acquiring or merging with industry
competitors
 Vertical Integration
• Expanding operations backward into an industry that
produces inputs for the company or forward into an
industry that distributes the company’s products
 Strategic Outsourcing
• Letting some value creation activities within a business
be performed by an independent entity

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 Horizontal Integration
Single-Industry Strategy
Horizontal Integration is the process of acquiring or merging
with industry competitors in an effort to achieve the
competitive advantages that come with large scale and scope.
Staying inside a single industry
allows a company to:
 Focus resources
Its total managerial, technological,
financial and functional resources
and capabilities are devoted to
competing successfully in one area.
 ‘Stick to its knitting’
Company stays focused on what it does best,
rather than entering new industries where its
existing resources and capabilities add little value.
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 Benefits of
Horizontal Integration
Profits and profitability increase when horizontal
integration:
1. Lowers the cost structure
• Creates increasing economies of scale
• Reduces the duplication of resources between two companies
2. Increases product differentiation
• Product bundling – broader range at single combined price
• Total solution – saving customers time and money
• Cross-selling – leveraging established customer relationships
3. Replicates the business model
• In new market segments within same industry
4. Reduces industry rivalry
• Eliminate excess capacity in an industry
• Easier to implement tacit price coordination among rivals
5. Increases bargaining power
• Increased market power over suppliers and buyers
• Gain greater control
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 Problems with
Horizontal Integration
A wealth of data suggests that the majority of mergers
and acquisitions DO NOT create value and that many
may actually DESTROY value.
 Implementing a horizontal integration is not an easy
task.
• Problems associated with merging very different company
cultures
• High management turnover in the acquired company when
the acquisition is a hostile one
• Tendency of managers to overestimate the benefits to be had
in the merger
• Tendency of managers to underestimate the problems
involved in merging their operations
 The merger may be blocked if merger is perceived to:
• Create a dominant competitor
• Create too much industry consolidation
• Have the potential for future abuse of market power
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 Vertical Integration
Entering New Industries
A company may expands its operations backward into
industries that produces inputs to its products or forward
into industries that utilize, distribute or sell it products.
 Backward Vertical Integration
• Company expands its operations into an industry
that produces inputs to the company’s products.
 Forward Vertical Integration
• Company expands into an industry that uses,
distributes, or sells the company’s products.
 Full Integration
• Company produces all of a particular input
from its own operations.
• Disposes of all of its completed products through its own outlets.
 Taper Integration
• In addition to company-owned suppliers, the company will also use
other suppliers for inputs or independent outlets in addition to
company-owned outlets.
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 Stages in the Raw Material
to Consumer Value Chain
Figure 9.1

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Raw Material to Consumer Value Chain
in the Personal Computer Industry
Figure 9.2

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 Full and Taper Integration
Figure 9.3

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 Increasing Profitability Through
Vertical Integration
A company pursues vertical integration to strengthen
the business model of its original or core business
or to improve its competitive position:
1. Facilitates investments in efficiency-enhancing
specialized assets
• Allows company to lower the cost structure or
• Better differentiate its products
2. Enhances or protects product quality
• To strengthen its differentiation advantage through either
forward or backward integration
3. Results in improved scheduling
• Makes it easier and more cost-effective to plan, coordinate,
and schedule the transfer of product within the value-added
chain
• Enables a company to respond better to changes in demand
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 Problems with
Vertical Integration
Companies may disintegrate or exit industries adjacent
to the industry value chain when encountering
disadvantages from the vertical integration:
 Cost structure is increasing.
• Company-owned suppliers develop a higher cost structure
than those of the independent suppliers
• Bureaucratic costs of solving transaction difficulties
 The technology is changing fast.
• Vertical integration may lock into old or inefficient technology
• Prevent company from changing to a new technology that
could strengthen the business model
 Demand is unpredictable.
 Creates risk in vertical integration investments.
Vertical integration can weaken business model when:
• Company-owned suppliers lack incentive to reduce costs
• Changing demand or technology reduces ability to be competitive
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Alternatives to Vertical Integration:
Cooperative Relationships
Strategic Alliances are long-term agreement between two or
more companies to jointly develop new products or processes
that benefit all companies concerned.
 Short-term contracts and competitive bidding
• May signal a company’s lack of commitment to its supplier
 Strategic alliances and long-term contracting
• Enables creation of a stable long-term relationship
• Becomes a substitute for vertical integration
• Avoids the problems of having to manage a company located in an
adjacent industry
 Building long-term cooperative relationships
• Hostage taking – creating a mutual dependency
• Credible commitments – a believable promise or pledge
• Maintaining market discipline – power to discipline supplier
• Periodic contract renegotiation  Parallel sourcing policy

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 Strategic Outsourcing
Strategic Outsourcing allows one or more of a company’s
value-chain activities or functions to be performed by
independent specialized companies that focus all their
skills and knowledge on just one kind of activity.
 Company is choosing to focus on a fewer
number of value-creation activities
 In order to strengthen its business model
 Company’s typically focus on noncore or
nonstrategic activities
 In order to determine if they can be performed more
effectively and efficiently by independent specialized
companies
 Virtual Corporation
 Describes companies that have pursued extensive
strategic outsourcing
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 Strategic Outsourcing of Primary
Value Creation Functions
Figure 9.4

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 Benefits of Outsourcing
1. Reducing the cost structure
• The specialist company cost is less than what it would cost
to perform the activity internally.
2. Enhanced differentiation
• The quality of the activity performed by the specialist is
greater than if the activity were performed by the company.
3. Focus on the core business
• Distractions are removed.
• The company can focus attention and resources on
activities important for value creation and competitive
advantage.
Strategic outsourcing may be detrimental when:
• Holdup – company becomes too dependent on specialist provider
• Loss of information – company loses important customer contact or
competitive information
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