Vertical Integration for Competitive Advantage in Strategic Management

1. Chapter 6

2. El proceso de administracion estrategica Analisis Externo Decisiones estrategicas Implementacion Estrategica Ventaja competitiva Mision Objetivos A que negocio entrar? Analisis Interno Integracion vertical Estrategia a nivel corporativo

3. 1) A fin de que la compania como un todo crezca • A fin de que los negocios dentro de la compania • puedan tener valor por si mismos de manera independiente • Que el valor de capital no pueda ser creado a traves de • inversion en portafolios Logica de la estrategia a nivel corporativo Estrategia a nivel corporativo debe de crear valor • La estrategia a nivel corporativo debe de generar sinergias que no son posible de crear en mercados de capital • integracion vertical+ cadenas economicas de valor

4. Agricultores semillas Ganaderos Distribuidores de alimentos Porcesadoras de queso Cadenas de Pizza Consumidor final Que es la integracion vertical Ejemplo de la pizza

5. agricultores semillas ganaderos distribuidores procesadores Cadenas de pizza Consumidor final Que es la integracion vertical? Integracion hacia atras Inegracion hacia adelante

6. ganaderos distribuidores procesadores Economias de la cadena de valor Logica economica Integracion hacia atras La firma focal es capaz de crear sinergia con otras firmas • reduccion en costos • mejora en beneficios • La firma focal es capaz de generar beneficios mayores a los de la competencia Integracion hacia adelante

7. Ventaja competitiva Si la integracion vertical cumple los criterios del VRIO, entonces puede generar una ventaja competitiva

8. Valor de la integracion vertical Mercado vs. intercambio economico integrado • los mercados y las formas de integracion permiten en intercambio economico • el intercambio economico debe de ser tal que permita Maximizar el valor de la firma focal • asi las firmas buscan la manera de maxmizar sus beneficios La integracion hace sentido cuando la firma focal puede generar mayor valor que aquel en el que el mercado se crea

9. Apalan- camiento Oportu- nismo flexibilidad Valor de la integracion vertical Consideraciones de valor • internalizar es menos flexible • las capacidades de Una firma pueden Ser fuentes de ventaja Competitiva en otros negocios • se puede generar al internalizar • flexibilidad se da cuando la Incertidumbre es alta • internalizar puede ser menos costoso Que utilizar oportunismo • de no ser asi, no Se da el intercambio

10. Rareza de la IV Integracion vs no integracion • la estrategia de integracion puede ser rara si integra o no lo hace pues esta NO depende la forma que la empresa tome sino quer depende en el valor generado

11. Imitabilidad de la IV Forma vs funcion • la forma, per se, no es costosa de imitar • la funcion de valor puede ser costosa de imitar si: •la combinacion de los recursos y capacidades le da: historicidad unica Abiguedad causal Complejidad social Requerimientos de capital son limitados

12. Imitabilidad de IV Modos de entrada • adquisicion de desarrollo interno • adquriri un proveeedor en vez de generarlos • los limites son las capacidades y recursos de las empresas • las alianzas estrategicas son un ejemplo de la IV a menos costo

13. Organizacion Functional Structure (U-Form) CEO’s Role Cooperation Accounting Finance Marketing HR Engineering Original Business Original Business Original Business Original Business Original Business Conflict Cooperation New Business New Business New Business New Business New Business Conflict

14. Organizacion de la IV Metodos de control administrativo Que se necesita controlar? • los esfuerzos para generar sinergias • cooperacion y conflicto entre areas • integracion de nuevos negocios • horizonte de tiempo entre administradores

15. Expansion Internacional Costo-Control tradeoff Cost (capital en riesgo) alto inversion Int. vertical adquisicion Alianza estrategica IV parcial franquicia licencia No IV exportacion Control bajo alto

16. • hace sentido cuando economias de la cadena de Valor se pueden crear y capturar • puede peritir a algunas companias apalancar sus capacidades • puede ser una respuesta al oportunismo y la incertidumbre • como un tipo de intercambio NO es raro ni ostoso de imitar Resumen Integracion vertical…

17. • es una decision importante de considerar para Posibles expansiones internacionales • hace sentido en circunstancias especificas • puede ser costosa si se hace mal Resumen La integracion vertical… Propiedad puede ser costosa, integrarse solo cuando los beneficios son mas que los costos

18. Chapter 7

19. The Strategic Management Process External Analysis Strategic Choice Strategy Implementation Competitive Advantage Mission Objectives Which Businesses to Enter? Internal Analysis • Vertical Integration Corporate Level Strategy • Diversification

20. Logic of Corporate Level Strategy Corporate level strategy should create value: 1) such that businesses forming the corporate whole are worth more than they would be under independent ownership 2) that equity holders cannot create through portfolio investing Therefore, • a corporate level strategy must create synergies • economies of scope - diversification

21. Integration and Diversification Integration Raw Materials Distribution Focal Firm Customer Supplier Forward Backward Diversification Other Businesses Other Businesses Current Businesses Many Links No Links Related Unrelated

22. Types of Corporate Diversification At a general level… Product Diversification: • operating in multiple industries Geographic Market Diversification: • operating in multiple geographic markets Product-Market Diversification • operating in multiple industries in multiple geographic markets

23. Types of Corporate Diversification At a more specific level… Limited Diversification • single business: > 95% of sales in single business • dominant business: 70% to 95% in single business Related Diversification • related-constrained: all businesses related on most dimensions • related-linked: some businesses related on some dimensions Unrelated Diversification • businesses are not related

24. Product and Geographic Diversification Possibilities: • single-business in one geographic area • single-business in multiple geographic areas • related-constrained in one or multiple geographic areas • related-linked in one or multiple geographic areas • unrelated in one or multiple geographic areas Note: • relatedness usually refers to products • seemingly unrelated products may be related on other dimensions

25. Competitive Advantage If a diversification strategy meets the VRIO criteria… Is it Valuable? Is it Rare? Is it costly to Imitate? Is the firm Organized to exploit it? …it may create competitive advantage.

26. Value of Diversification Two Criteria 1) There must be some economy of scope 2) The focal firm must have a cost advantage over outside equity holders in exploiting any economies of scope

27. Business X Business X Business Y Business Y Business Z Business Z Value of Diversification Value + + Independent: equity holder could buy shares of each firm Focal Firm Value Economies Of Scope Combined: equity holder buys shares in one firm

28. Economies of Scope Four Types Operational Financial Anticompetitive Managerialism

29. Economies of Scope Operational Economies of Scope Sharing Activities • exploiting efficiencies of sharing business activities Example: Frito-Lay’s Trucking Spreading Core Competencies • exploiting core competencies in other businesses • competency must be strategically relevant Example: Orbitz

30. Economies of Scope Financial Economies of Scope Internal Capital Market • premise: insiders can allocate capital across divisions more efficiently than the external capital market • works only if managers have better information • may protect proprietary information • may suffer from escalating commitment Example: Hanson Trust, PLC

31. Economies of Scope Financial Economies of Scope Risk Reduction • counter cyclical businesses may provide decreased overall risk however, • individual investors can usually do this more efficiently than a firm Example: Snow Skiis & Water Skiis

32. Economies of Scope Financial Economies of Scope Tax Advantages • transfer pricing policy allows profits in one division to be offset by losses in another division • this is especially true internationally • can be used to ‘smooth’ income Example: Ireland

33. Economies of Scope Anticompetitive Economies of Scope Multipoint Competition • mutual forbearance • a firm chooses not to compete aggressively in one market to avoid competition in another market Example: American Airlines & Delta: Dallas & Atlanta Market Power • using profits from one business to compete in another business • using buying power in one business to obtain advantage in another business

34. Economies of Scope Managerialism • an economy of scope that accrues to managers at the expense of equity holders • managers of larger firms receive more compensation (larger scope = more compensation) • therefore, managers have an incentive to acquire other firms and become ever larger • even though the incentive is there, it is difficult to know if managerialism is the reason for an acquisition

35. Equity Holders and Economies of Scope Most economies of scope cannot be captured by equity holders • risk reduction can be captured by equity holders Managers should consider whether corporate diversification will generate economies of scope that equity holders can capture • if a corporate diversification move is unlikely to generate valuable economies of scope, managers should avoid it

36. Rareness of Diversification Diversification per se is not rare Underlying economies of scope may be rare • relationships that allow an economy of scope to be exploited may be rare • an economy of scope may be rare because it is naturally or economically limited • a soft drink bottler buys the only source of spring water available • a hotel in a resort town creates a large water park, there are only enough customers to support one park

37. Imitability of Diversification Duplication of Economies of Scope Less Costly-to-Duplicate Costly-to-Duplicate Core Competencies Employee Compensation Tax Advantages Internal Capital Allocation Multipoint Competition Risk Reduction Shared Activities* Exploiting Market Power (tacit/intangible) (codified/tangible) *may be costly depending on relationships

38. Imitability of Diversification Substitution of Economies of Scope Internal Development Strategic Alliances • find a partner with the desired complementary assets • start a new business under the corporate whole • avoids potential cross- firm integration issues • less costly than acquiring a firm Competitors may use these strategies to arrive at a position of diversification without buying another firm

39. International Diversification Three Types of International Risk Financial Cultural/Popular Political • nationalization • currency exchange • product may not be accepted simply because of your country of origin • quotas • general economic conditions • tariffs • regulations Example: Resistance to McDonald’s by France’s older generation Example: Bolivia nationalized its petroleum industry in the ’70s Example: Asian economic crisis of the 1990s

40. International Diversification Managing International Risks Cultural/Popular • avoidance • neutral branding (disguising country of origin) Example: Where is Häagen-Dazs from? Financial • currency hedging • geographic diversification • spreading risk across several countries

41. International Diversification Managing International Risks Political • find a local partner • political neutrality • negotiation with governments • foreign governments often have an interest in direct investment Example: Case International in Brazil

42. Summary Corporate Strategy: In what businesses should the firm operate? • an understanding of diversification helps managers answer that question Two Criteria: 1) economies of scope must exist 2) must create value that outside equity holders cannot create on their own

43. Summary Economies of Scope • a case of synergy—combined activities generate greater value than independent activities • may generate competitive advantage if they meet the VRIO criteria Firms should pursue diversification only if careful analysis shows that competitive advantage is likely!