Formulation Corporate Strategy McGrawHill Textbook 1
Formulation Corporate Strategy McGrawHill Textbook 1
Corporate Strategy:
Vertical Integration and
Diversification
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Corporate Strategy
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Why Firms Need to Grow
To motivate management.
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Three Dimensions of Corporate Strategy
1. Vertical integration.
2. Diversification.
3. Geographic scope.
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Transaction Costs
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Internal and External Transaction Costs
Exhibit 8.2
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Make or Buy?
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Organizing Economic Activity: Firms vs. Markets
Exhibit 8.3
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Alternatives on the Make-or-Buy Continuum
Exhibit 8.4
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Vertical Integration
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Backward and Forward Vertical Integration along an Industry
Value Chain
Exhibit 8.5
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The Vertical Value Chain of Your Cell
Phone
Raw materials:
• Chemicals, ceramics, metals, oil for plastic.
Exhibit 8.6
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Benefits of Vertical Integration
Lowering costs.
Improving quality.
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Risks of Vertical Integration
Increasing costs.
Reducing quality.
Reducing flexibility.
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When Does Vertical Integration Make
Sense?
When there are issues with raw materials.
• Example: Henry Ford ran mining operations.
To enhance the customer experience.
• Eliminate annoyances and poor interfaces.
Vertical market failure: when transactions are too
risky or costly.
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Alternatives to Vertical Integration
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Taper Integration along the Industry Value Chain
Exhibit 8.7
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Types of Diversification
Product Diversification:
• Increase in variety of products / services.
• Active in several product markets.
Geographic Diversification:
• Increase in variety of markets / geographic regions.
• Regional, national, or international markets.
Product-Market Diversification:
• Product and geographic diversification.
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Types of Corporate Diversification
3. Related diversification:
• Constrained: all businesses share competencies.
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The Diversification-Performance Relationship
Exhibit 8.11
Source:. Adapted from L.E. Palich, L.B. Cardinal, and C.C. Miller (2001), “Curvilinearity in the diversification-performance linkage: An examination of
over three decades of research,” Strategic Management Journal 21: 155–174..
Access the text alternate for slide image.
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How Diversification Can Enhance Firm
Performance
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Restructuring
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