CORPORATE LEVEL STRATEGY: HORIZONTAL & VERTICAL INTEGRATION; OUTSOURCING

1. CORPORATE LEVEL STRATEGY:HORIZONTAL & VERTICAL INTEGRATION; OUTSOURCING BUS 189 SPRING 2014 DR. MARK FRUIN

2. 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

3. SINGLE INDUSTRY STRATEGIES • HORIZONTAL INTEGRATION: PREMIER SINGLE INDUSTRY STRATEGY • WHY? 1) FOCUS IN ONE AREA; 2) STICK TO WHAT ONE KNOWS BEST • BUT AN 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

4. PROBS W/ HORIZ. INTEGRATION • DATA SAY 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 (FEDS) • TOO MUCH CONCENTRATION & MARKET POWER • HOW MUCH IS TOO MUCH MAY BE HARD TO DETERMINE IN GLOBAL ECONOMY

5. VERTICAL INTEGRATION • VERTICAL INTEGRATION - A STRATEGY OF MOVING INTO NEW INDUSTRIES THAT ARE DIRECTLY RELATED TO CORE BUSINESS • BACKWARD OR UPSTREAM VERTICAL INTEGRATION • BACKWARD TOWARDS SOURCES OF SUPPLY OF RAW MATERIALS, INTERMEDIATE GOODS, COMPONENTS, SUB-ASSEMBLIES AND ASSEMBLIES • WHY DO THIS? • FORWARD OR DOWNSTREAM VERTICAL INTEGRATION • FORWARD TOWARDS CUSTOMERS & THE MARKET • DISTRIBUTION, LOGISTICS, MARKETING & SALES • WHY DO THIS?

6. 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 • IS THIS THE SAME “MAKE OR BUY DECISION” THAT FIRMS FACE IN THEIR 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 QUALITY YOU WANT OR ARE NOT WILLING TO ACCEPT THE RISK, TAKEOVER SPECIALIZED ASSETS • IMPROVE SCHEDULING & THROUGHPUT: STREAMLINE & GUARANTEE FLOWS & TIMING

7. PROBS W/ VERTICAL INTEGRATION • INCREASED COSTS/COST STRUCTURE • ACQUISITION COSTS • TRANSACTION COSTS • TRANSACTION COSTS ASSOCIATION W/ACQUISITION • TRANSACTION COSTS ASSOC. WITH BUREAUCRACY • COORDINATION COSTS • HIGHER TRANSFER PRICES W/I COMPANY AFTER ACQUISITION; “CAPTURED CLIENT” SYNDROME – NO LONGER HAVE TO COMPETE FOR THE BUSINESS • CHANGES IN TECHNOLOGY • MAY NOT UNDERSTAND NEW INDUSTRY DYNAMICS • 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

8. LIMITS TO VERTICAL INTEGRATION • DO YOU UNDERSTAND WHAT’S GOING ON? – COSTS OF INFORMATION • CAN YOU MANAGE WELL ACROSS INDUSTRIES? • YOUR OWN AND THE NEW ONE/S • CAN YOU PROTECT YOUR COMPETITIVE ADVANTAGE? • DO YOU HAVE SUSTAINABLE COMPETITIVE ADVANTAGES & HOW TO HOLD ONTO THEM? • COPE W/ GLOBAL COMPETITION? • IN MANY INDUSTRIES, IT’S A NEW BALL GAME

9. ALTERNATIVES TO V. I. • SHORT TERM CONTRACTS & COMPETITIVE BIDDING • PROBLEMS WITH MARKETS ARE VARIABLE COSTS & SPORADIC SUPPLY, ESP SUPPLY HINGING ON SPECIALIZED ASSETS • OF COURSE, THE ADVANTAGES OF MARKETS (AS OPPOSED TO HIERARCHIES ((FIRMS)) 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, MAY LOSE MORE THAN GAIN • LONG TERM PARTNERSHIPS, WITH SUPPLIERS, FOR EXAMPLE • HOSTAGE TAKING: SIZABLE, 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 SOME MANAGERIAL RESPONSIBILITIES FOR V. I. STRATEGIES • ENTIRE VALUE-CREATING ACTIVITIES THAT WERE PART OF A VALUE CHAIN ARE OUTSOURCED (REMOVED) TO OTHER FIRMS • 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 ASSESSING THE RESULTS OF ITS H.I., V.I. & S.O. STRATEGIES? • HOW MUCH BENEFIT IN WHAT TIMEFRAME?

12. ELECTROLUX & C.L. STRAEGIES • DOES ELECTROLUX PRACTICE VERTICAL AND/OR HORIZONTAL INTEGRATION? • IN WHICH INDUSTRIES, IF ANY, DOES THE ELECTROLUX HAVE SUSTAINABLE COMPETITIVE ADVANTAGES & WHY? • WHAT ARE SOURCES OF ELECTROLUX’S DISTINCTIVE COMPETENCIES • SCAs are often plural, not singular • SCAs are based on combining and leveraging capabilities & competencies • CHOICE, INVESTMENT & FOCUSED EFFORT ARE KEYS TO SUCCESS W/ ANY STRATEGY