Vertical integration is undertaken to support the competitive position of a companys core business.

Week 7. Chapter 7. Corporate-Level Strategy and Long-Run Profitability.

The principal concern of corporate-level strategy is to identify the industry or industries a company should participate in to

maximize its long-run profitability.

A company has several options when choosing which industries to compete in. First, a company can concentrate on only

one industry and focus its activities on developing business-level strategies to improve its competitive position in that

industry (see Chapter 5). Second, a company may decide to enter new industries in adjacent stages of the industry value

chain by pursuing a strategy of vertical integration, which means it either begins to make its own inputs and/or sell its own

products. Third, a company can choose to enter new industries that may or may not be connected to its existing industry by

pursuing a strategy of diversification. Finally, a company may choose to exit businesses and industries to increase its long-

run profitability and to shrink the boundaries of the organization by restructuring and downsizing its activities.

If corporate-level strategy is to increase long-run profitability, it must enable a company, or its different business units, to

perform one or more value creation functions at a lower cost and/or in a way that leads to increased differentiation (and thus

a premium price). Thus, successful corporate-level strategy works to build a company’s distinctive competencies and

increase its competitive advantage over industry rivals. There is, therefore, a very important link between corporate-level

strategy and creating competitive advantage at the business level.

№1 CONCENTRATION ON A SINGLE INDUSTRY

Concentration on a Single Industry - the strategy a company adopts when it focuses its resources and capabilities

on competing successfully within a particular product market.

A major advantage of concentrating on a single industry is that doing so enables a company to focus all its managerial,

financial, technological, and functional re- sources and capabilities on developing strategies to strengthen its competitive

position in just one business.

This strategy is important in fast-growing industries that make strong demands on a company’s resources and capabilities

but also offer the prospect of substantial long-term profits if a company can sustain its competitive advantage. For example,

there is no sense for Starbucks to enter new industries such as supermarket, when coffee shop industry is still in a period of

rapid growth and when finding new ways to compete successfully would impose significant demands on Starbucks’

managerial, marketing, and financial resources and capabilities.

Many mature companies that expand over time into too many different businesses and markets find out later that they have

stretched their resources too far and that their performance declines as a result. For example, when Coca Cola acquired

Columbia Pictures to expand into movies business, it soon found that it lacked the competencies to compete successfully in

that industry with eg Fox etc. Coca-Cola concluded that entry into these new industries had reduced rather than created

value and lowered its pro tability; it divested or sold off these new businesses at a significant loss.

Concentrating on a single business allows a company to “stick to the knitting”— that is, to focus on doing what it knows

best and avoid entering new businesses it knows little about and where it can create little value.

On the other hand, concentrating on just one market or industry can result in dis- advantages emerging over time. As we

discuss later in the chapter, a certain amount of vertical integration may be necessary to strengthen a company’s competitive

advantage within its core industry.

1)Horizontal Integration

Horizontal Integration - Acquiring or merging with industry competitors to achieve the competitive advantages

that come with large size.

Acquisition- A company’s use of capital such as stock, debt, or cash to purchase another company.

Merger- An agreement between two companies to pool their operations and create a new business entity.

What does vertical integration do for a company?

What is vertical integration?

How does vertical integration create a competitive advantage?

What is vertical integration and what is its objective?