Slide 1Questions of Outsourcing?Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Vertical Vertical IntegrationIntegrationChapter 6Chapter 6Vertical IntegrationStrategic Management & Competitive Advantage – Barney & Hesterly2Vertical IntegrationVertical IntegrationCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly22Questions of Outsourcing?•What is offshoring?•Is outsourcing or offshoring good?•What are the ethical implications for outsourcing?•What are the ethical implications for offshoring?•What are the implications for different stakeholder groups?Vertical IntegrationStrategic Management & Competitive Advantage – Barney & Hesterly3Vertical IntegrationVertical IntegrationCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly33Mission ObjectivesExternalAnalysisInternalAnalysisStrategicChoiceStrategyImplementationCompetitiveAdvantageThe Strategic Management ProcessCorporate LevelStrategyWhich Businessesto Enter?• Vertical IntegrationVertical IntegrationStrategic Management & Competitive Advantage – Barney & Hesterly4Vertical IntegrationVertical IntegrationCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly44Logic of Corporate Level StrategyCorporate level strategy should create value:2) such that businesses forming the corporate wholeare worth more than they would be under independent ownership3) that equity holders cannot create throughportfolio investing • a corporate level strategy should createsynergies that are not available in equitymarkets• vertical integration = value chain economies1) such that the value of the corporate whole increasesVertical IntegrationStrategic Management & Competitive Advantage – Barney & Hesterly5Vertical IntegrationVertical IntegrationCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly55What is Vertical Integration?Leprino Foods(Mozzarella Cheese)Where your pizza comes fromDairy Farmers(milk)Crop Farmers(Alfalfa & Corn)Seed Companies(Alfalfa & Corn)Food DistributorsPizza ChainsEnd ConsumerVertical IntegrationStrategic Management & Competitive Advantage – Barney & Hesterly6Vertical IntegrationVertical IntegrationCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly66What is Vertical Integration?Leprino Foods(Mozzarella Cheese)Dairy Farmers(milk)Crop Farmers(Alfalfa & Corn)Seed Companies(Alfalfa & Corn)Food DistributorsPizza ChainsEnd ConsumerBackwardVerticalIntegrationForwardVerticalIntegrationVertical IntegrationStrategic Management & Competitive Advantage – Barney & Hesterly7Vertical IntegrationVertical IntegrationCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly77Value Chain EconomiesDairy Farmers(milk)Food DistributorsBackwardVerticalIntegrationForwardVerticalIntegrationLeprino Foods(Mozzarella Cheese)The Logic of Value Chain Economies• the focal firm is able tocreate synergy with theother firm(s) • the focal firm is able tocapture above normal economic returns(avoid perfect competition)• cost reduction• revenue enhancementVertical IntegrationStrategic Management & Competitive Advantage – Barney & Hesterly8Vertical IntegrationVertical IntegrationCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly88Competitive AdvantageIf a vertical integration strategy meets theVRIO criteria…Is it Valuable?Is it Rare?Is it costly to Imitate?Is the firm Organized to exploit it?…it may create competitive advantage.Vertical IntegrationStrategic Management & Competitive Advantage – Barney & Hesterly9Vertical IntegrationVertical IntegrationCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly99Value of Vertical IntegrationMarket vs. Integrated Economic Exchange (Coase, 1937)• economic exchange should be conducted in the formthat maximizes value for the focal firm • markets and integrated hierarchies are ‘forms’ in whicheconomic exchange can take place• thus, firms assess which form is likely to generatemore value Integration makes sense when the focal firm can capture more value than a market exchange providesVertical IntegrationStrategic Management & Competitive Advantage – Barney & Hesterly10Vertical IntegrationVertical IntegrationCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly1010Value of Vertical IntegrationThree Value ConsiderationsLeverageCapabilitiesExploitFlexibilityManageOpportunism• firm capabilitiesmay be sourcesof competitiveadvantage inother businesses• if not, then don’tintegrate exchange• opportunismmay be checkedby internalizing (TSI)• internalizing mustbe less costly thanopportunism• internalizing isusually lessflexible• flexibility is prized whenuncertainty ishighVertical IntegrationStrategic Management & Competitive