Theory of

Strategic
Management
Hill Jones
Chapter 9

CORPORATE-LEVEL STRATEGY

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 Learning Objectives
• Discuss how corporate-level strategy can be used
• Define horizontal integration- advantages &
disadvantages
• Explain difference between company and industry value
chain
• Discuss why and under what conditions cooperative
relationships may become a substitute for vertical
integration

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scanned,
except for or
permitted
use duplicated,
in a
for classroom
as permitted inin wholedistributed
a license or in part,
withexcept
a certainfor useorasservice or otherwise on a password-protected website
product
license distributed with a certain product or service or
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otherwise on a password-protected website for classroom use.
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1-2
 “The great commander knows
when to attack and when to
stand down. Never fight a battle
when nothing is
gained by winning.”
- General George S. Patton

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Reserved. May not be copied, scanned, or duplicated, in whole or in
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 Corporate-Level Strategy
How do we sustain competitive advantages in our
current business? What new businesses or industries
do we wish to enter?

Corporate strategy is used to identify:

1. Businesses/industries firm should be in
2. Value creation activities firm should perform
3. Methods to enter/exit businesses/industries to maximize long-
run profitability

Companies must adopt a long-term perspective

in formulating a corporate-level strategy.
9-4
 Corporate-Level Strategy
and Multi-Business Model
Multi-Business
Company Must Construct:
1) Business model & strategies for each
business unit/division in every industry
it competes
2) Higher-level model- justifies Division

Business Business

entry into different businesses Unit Unit

Dept. Dept. Dept.

& industries
9-5
 Repositioning &
Redefining A Business Model
Corporate-level strategies primarily directed toward improving
company’s competitive advantage and profitability in present
business or product line.
 Horizontal Integration- acquiring/merging with
industry competitors
 Vertical Integration- expanding operations
backward into industry that produces inputs for
company or forward into industry that distributes
company’s products
 Strategic Outsourcing- letting some value
creation activities within business be performed
by independent entity
9-6
 Horizontal Integration:
Single-Industry Strategy
Process of acquiring/merging with industry competitors in
effort to achieve competitive advantages that come with large
scale & scope.
Staying in single industry allows firm to:
 Focus resources- resources devoted
to competing successfully in one area
 ‘Stick to the knitting’- company
stays focused on what it does best
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 Benefits of Horizontal
Integration
Profits/profitability increase if horizontal integration:

1. Lowers cost structure

2. Increases product differentiation
• Product bundling
• Cross-selling
3. Replicates business model
4. Reduces industry rivalry
5. Increases bargaining power
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 Problems with
Horizontal Integration
Data suggests the majority of mergers/acquisitions DO
NOT create value and many may DESTROY value.

o Implementing horizontal integration not easy task

• Problems with merging different company cultures
• High management turnover in acquired when acquisition is
hostile
• Managers tend to overestimate benefits of merger
• Managers tend to underestimate problems in merging
o Merger may be blocked if perceived to:
• Create dominant competitor
• Create too much industry consolidation
• Have potential for future abuse of market power
9-9
 Vertical Integration:
Entering New Industries
 Backward Vertical- expands into
industry that produces inputs to
company
 Forward Vertical- company expands
into industry that uses, distributes,
sells company’s products

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 Stages in Raw-Materials-to-
Customer Value-Added Chain

Figure 9.1

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 Raw-Materials-to-Customer
Value-Added Chain in PC Industry

Figure 9.2

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 Increasing Profitability
Through Vertical Integration
“...strengthens the business model of the core business or...
improves its competitive position.
1. Facilitates investments in specialized assets- lowers
cost structure or better differentiation.
2. Enhances product quality- strengthens its
differentiation advantage through either forward or
backward integration
3. Improved scheduling
• Easier & more cost-effective to plan, transfer of
product in value-added chain
• Enables company to respond better to changes in
demand
9-
 Problems with Vertical Integration
o Increased Cost Structure
• Company-owned suppliers develop higher cost
structure than independent suppliers
• Bureaucratic costs of solving transaction
difficulties
o Technological Change
• May lock into old/inefficient technology
• Prevent company from changing to new
technology that could strengthen business model
o Unpredictable Demand
o Creates risk in vertical integration
investments
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 Vertical Integration Limits

 Company-owned suppliers
lack incentive to reduce costs

 Changing demand/technology
reduces ability to be competitive

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 Alternatives to Vertical Integration:
Cooperative Relationships
 Short-term contracts/competitive bidding- lack of
commitment to supplier
 Strategic alliances/long-term contracting
• Enables creation of stable long-term relationship
• Becomes substitute for vertical integration
• Avoids problems of managing additional company
 Building long-term cooperative relationships
• Hostage taking – creating mutual dependency
• Credible commitments – believable promise/pledge
• Maintaining market discipline
• Periodic contract renegotiation
• Parallel sourcing policy
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 Strategic Outsourcing
Allows one or more of company’s value-chain
activities/functions to be performed by independent
specialized companies to focus all skills/knowledge on one
activity.

 Focus on fewer value-creation activities

 Goal to outsource noncore/nonstrategic activities
 Virtual Corporation- companies that pursue extensive
strategic outsourcing

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 Strategic Outsourcing of
Primary Value Creation Functions

Figure 9.3
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 Benefits of Outsourcing
1. Lower cost structure- specialist cost is less than
performing activity internally
2. Enhanced differentiation- quality of activity
performed by specialist is greater than if activity
were performed by the company
3. Focus on the core business
• Distractions are removed
• Company can focus attention/resources on activities
important for value creation/competitive advantage

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 Risks of Outsourcing

 Holdup – company becomes too

dependent on specialist provider
 Loss of information – company
loses important customer contact or
competitive information

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 “Coke can grow faster
by forming alliances
that give it access to
research and other
expertise.”
- Douglas Daft,
Chairman, Coca-Cola
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