Business Finance
Saint Cloud State University Corporate Level Strategy Paper

Saint Cloud State University

Question Description

Can you help me understand this Management question?

Topic # 1: strategic motives behind vertical integration and outsourcing.

Read chapter 9 and think about the topic (sometimes additional research may be

necessary) and post your opinions/essays (about a half to one page, single-spaced) post it in word document.

Topic # 2: : How to achieve competitive advantages through related diversification strategy

Read chapter 9 and think about the topic (sometimes additional research may be

necessary) and post your opinions/essays (about a half to one page, single-spaced) post it in word document.

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Chapter 9. Corporate-Level Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing 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 © Cengage Learning “The great commander knows when to attack and when to stand down. Never fight when nothing is gained by winning.” - General George S. Patton © Cengage Learning 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. © Cengage Learning Corporate-Level Strategy and Multi-Business Model 1) Business model & strategies for each business unit/division in every industry it competes 2) Higher-level model- justifies entry into different businesses & industries Division Business Unit Dept. Dept. Business Unit Dept. © Cengage Learning 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 © Cengage Learning 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 © Cengage Learning 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 © Cengage Learning 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 © Cengage Learning 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 © Cengage Learning Stages in Raw-Materials-toCustomer Value-Added Chain © Cengage Learning Raw-Materials-to-Customer Value-Added Chain in PC Industry © Cengage Learning 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 © Cengage Learning 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 o Changing demand/technology reduces ability to be competitive © Cengage Learning 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 © Cengage Learning Strategic Outsourcing of Primary Value Creation Functions © Cengage Learning 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 © Cengage Learning Risks of Outsourcing ❖ Holdup – company becomes too dependent on specialist provider ❖ Loss of information – company loses important customer contact or competitive information © Cengage Learning Chapter 10. Corporate-Level Strategy: Formulating and Implementing Related and Unrelated Diversification Learning Objectives • Differentiate between models based on related/unrelated diversification • Explain ways diversification can create profitability • Discuss conditions that lead managers to pursue related/unrelated diversification & why • Describe methods used to enter new industries • Discuss advantages/disadvantages of each method © Cengage Learning Why Diversify? When company is generating free cash flow with resources in excess of those needed to maintain competitive advantage. © Cengage Learning Strategy of Diversification Types of diversification: – Related diversification – Unrelated diversification Methods to implement diversification strategy: – Internal new ventures – Acquisitions – Joint ventures © Cengage Learning Value Chain Functions Enables Company to Perform 1) At lower cost 2) In way that allows differentiation & gives pricing options 3) Helps manage industry rivalry better © Cengage Learning Ways to Diversify = Increase Profitability ✓Transfer competencies ✓Leverage competencies ✓Share Resources & Capabilities ✓Product bundling ✓General organizational competencies © Cengage Learning Transferring Competencies Taking a distinctive competency developed in one industry and implanting it in EXISTING business unit in another industry Competencies transferred must involve activities important to establish competitive advantage © Cengage Learning For strategy to work, the distinctive competency being transferred must have real strategic value. Increase profitability when: 1) Lowers cost structure of one or more business units 2) Enables one or more business units to better differentiate products © Cengage Learning Sharing resources and capabilities across two or more business units in different industries to realize economies of scope. Economies of scope arise when business units effectively pool, share, & utilize expensive resources or capabilities = possible only when significant commonalities between one or more value-chain functions. © Cengage Learning Sharing Resources at Procter & Gamble © Cengage Learning General Organizational Competencies Skills transcend individual functions or business units. Capabilities help business unit perform at higher level than operated as individual: 1) Entrepreneurial – encourage risk taking 2) Organizational design – create structure, culture, & control systems 3) Superior strategic management – effectively manage managers of business units © Cengage Learning Types of Diversification ❖ Related - entry into new business in different industry: ❖ • Related to company’s existing business/activities • Has commonalities between one or more components of each activity’s value chain Based on transferring/leveraging competencies, sharing resources, & bundling products Unrelated - entry into industries with no connection to any of company’s activities in present industry or industries Based on only general organizational competencies to increase profitability of all business units © Cengage Learning Disadvantages/Limits of Diversification Conditions = diversification disadvantageous: 1. Changes in Industry/Company – – Unpredictable future Willing to divest business units 2. Diversification for the Wrong Reasons – – Clear vision of how value will be created. Extensive diversification can reduce profitability. 3. Bureaucratic Costs of Diversification – – Costs are function of number of business units portfolio Extent coordination is required to gain benefits. © Cengage Learning Factors Ignored in Pooling Diversification Risk ➢Stockholders can diversify own portfolio ➢Business cycles of different industries are difficult to predict – economic downturn affects all © Cengage Learning Choosing Strategy Depends on comparison of benefits of each strategy versus cost of pursuing it: • Related – Competencies can be applied across greater number of industries – Superior capabilities to control bureaucratic costs • Unrelated – Functional competencies have few uses across industries – Organizational design skills to build competencies May pursue both strategies simultaneously © Cengage Learning Sony’s Web of Corporate-Level Strategy © Cengage Learning Internal New Ventures Process of transferring/creating new business unit/division in new industry. Pitfalls: Scale of Entry Poor Implementation © Cengage Learning Successful Internal New Venturing ✓ Place funding for research in hand of business unit managers ✓ Effective use of R & D competency ✓ Foster close links between R & D and marketing ✓ Large-scale entry leads to greater long-term profits © Cengage Learning Attractions of Acquisitions Principle strategy to start horizontal integration: • Lack of distinctive competencies • Need to move quickly • Perceived as less risky than internal new ventures • Attractive way to enter new industry protected by high barriers to entry © Cengage Learning Acquisition Pitfalls • Overestimating economic benefits • Expense of acquisitions • Inadequate preacquisition screening © Cengage Learning Guidelines for Successful Acquisition • • • • Identification and screening Bidding strategy Integration Learning from experience © Cengage Learning Joint Ventures Attractions: • • Avoid risks/costs of building new operation Sharing complementary skills/assets increase probability of success Pitfalls: • • • Sharing profits if new business succeeds Venture partners must share control – conflicts can cause failure Risk of giving know-how away to joint venture partner © Cengage Learning Restructuring Process of divesting businesses and exiting industries to focus on core distinctive competencies to increase company profitability. Why Restructure? • Diversification discount- investors see highly diversified companies as less attractive • Response to failed acquisitions • Innovations in strategic management have diminished advantages of vertical integration or diversification © Cengage Learning “Growth does not always lead a business to build on success. All too often it converts a highly successful business into a mediocre large business.” © Cengage Learning ...
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Corporate level strategy
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Strategic motives behind vertical integration and outsourcing
Firms engage in vertical integration for various strategic reasons. Understanding theses
strategic reasons why firms may engage in vertical integration calls for the consideration that
vertical integration can be backward or forward vertical integration. Forward vertical integration,
as the name suggests, focuses on the firm's output, how it is distributed and consumed. On the
other hand, backward vertical integration focuses on the sectors of obtaining inputs.
Vertical integration is capable of making a business model stronger and more efficient in its
structure. In addition to that, it is able to bring in advantages competitively. On...


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