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Strategic Management
, Sixth Edition
Charles W. L. Hill, University of Washington
Gareth R. Jones, Texas A&M University
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Chapter Summaries
Chapter 9: Corporate Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing
- A corporate strategy should enable a company, or one or more of its business
units, to perform one or more of the value creation functions at a lower
cost or in a way that allows for differentiation and a premium price.
- Horizontal integration can be understood as a way of trying to increase the
profitability of a company by
- reducing costs,
- increasing the value of the company's product offering through differentiation,
- managing rivalry within the industry to reduce the risk of price warfare, and
- increasing bargaining power over suppliers and buyers.
- There are two drawbacks associated with horizontal integration: the numerous
pitfalls associated with mergers and acquisitions and that the strategy can bring a company into direct conflict with the antitrust
authorities.
- Vertical integration can enable a company to achieve a competitive advantage
by helping build barriers to entry, facilitating investments in specialized assets, protecting product quality, and helping
to improve scheduling between adjacent stages in the value chain.
- The disadvantages of vertical integration include cost disadvantages if a
company's internal source of supply is a high-cost one and lack of flexibility when
technology is changing fast or demand is uncertain.
- Entering into a long-term contract can enable a company to realize many of
the benefits associated with vertical integration without having to bear the same level of
bureaucratic costs. However, to avoid the risks associated with becoming
too dependent on its partner, it needs to seek a credible commitment from
its partner or establish a mutual hostage-taking situation.
- The strategic outsourcing of noncore value creation activities may allow
a company to lower its costs, better differentiate its product offering,
and make better use of scarce resources, while also enabling it to respond rapidly to changing market conditions. However,
strategic outsourcing may have a detrimental effect if the company outsources
important value creation activities or becomes too dependent on key suppliers
of those activities.
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