Strategic Management John D. Macomber Lecture Notes: Savannah West (HBS 9-381-081) Vertical Integration2 Analytical Framework # 1: The Real Estate Value System Operator Labor Subcontractor Constructor Designer User Project Land and Consultant Labor Product CASHFLOW PRODUCT Strategic Management John Macomber Owner/ Engineer Sponsor Distributor End Permanent Finance Finance Permissions Material Material Building Manufacturer3 AEC/EPC Supply Chain: Owner/Sponsor Isolating Risk Operator Labor Subcontractor Constructor Designer User Project Land and Consultant Labor Product Market Risk Finance Risk Design and Construction Risk Strategic Management John Macomber Owner/ Engineer Sponsor Distributor End Permanent Finance Finance Permissions Material Material Building ManufacturerStrategic Management John Macomber 4Analytical Framework #2: Market Segmentation Market Segmentation Example: Engineered Concepts Non US US Gov't Private Owner Owner Housing Commercial Institu 1 - Fam Multi Fam Office Whse Manu School Hosp Atlanta Savan Fla Tex New Reno Property Management Property Ownership Real Estate Development General Contracting Design Specialty Contracting Mortgage Brokering = proven = trying = could5 Vertical Integration: Benefits (Competitive Strategy, Ch. 14) • Economies of combined operations • Economies of internal control and coordination • Economies of avoiding the market • Economies of stable relationships • Assure supply and/or demand • Enhanced ability to differentiate Strategic Management John Macomber6 Strategic Costs of Integration • Increased operating leverage (more fixed costs) • Reduced flexibility to change partners • Higher overall exit barriers • Maintaining Balance (capacity and throughput) • Dulled incentives • Differing managerial requirements Strategic Management John Macomber7 Illusions in Vertical Integration Decisions • A strong market position in one stage can automatically be extended to another • It is always cheaper to do things internally • business • Vertical integration can save a strategically sick business • Experience in one part of the value chain automatically qualifies management to direct upstream or downstream units Strategic Management John Macomber It often makes sense to integrate into a competitiveStrategic Management John D.