CANS 406 Lecture Notes - Lecture 12: The Home Depot, Pharmaceutical Industry, Horizontal Integration
22 May 2018
School
Department
Course
Professor
Corporate-level strategy
Feb 15th 2018
Midterm: based on theory, not cases in class
• Disney: entertainment (theme parks and film production), but also other products
o Diversified company
Two strategy levels
• Business-unit level strategy (competitive) (ch. 4 & 5)
o What are the drivers of industry profitability?
o How can a firm create competitive advantage?
• Corporate-level strategy (company-wide) (ch. 6 &7)
o What is the mix of industries we should be in?
• diversification
o How do we add value in each unit?
Corporate-level strategy: superior long-rn performance
• In practice
o All firms have a corporate strategy, even single-line business
• Decision not to engage in other industries is important
▪ Home Depot is not engaging in another industry
o CEOs: often focused with corporate strategy
• High-level decision on how should the corporate office manage the group of
businesses?
• Sometimes their interests are shared with interests of shareholders, sometimes not
o Bad corporate strategies
• Corporate raiders, hedge funds
▪ Waiters will go in and pursue the market share of companies with bad strategies
o Less well understood than business unit strategy
• Can be a source of advantage, but less so know
▪ Availability of information
Role of diversification
• Diversification strategies play a major role in behavior of large firms
• Horizontal integration
o Expansion into multiple businesses that share inputs (tangible and/or intangible resources)
o
find more resources at oneclass.com
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• Vertical integration (when company is involved in different businesses)
o Expansion into businesses that make inputs for -or use the output of- other units within the
corporation
o Can occur in two directions
o Backward or upstream integration
• Ex: manufacturing firm supplies its own raw materials of components
o Forward or downstream integration
• Manufacturing firm moves into marketing/distribution
o
• Backward into film industry (Pixar)
• Forward with Disney stores (used to let distribution to other companies)
o Another ex:
• Budweiser
▪ Make their own can, by backward integrating
• International expansion
o Expansion into multiple geographic markets to leverage investments in tangible and
intangible markets
o
o Instances where international expansion doesn't involved going into different
industry/market (not always diversification)
• Pharmaceutical industry: rely on same label, distributors, customers
Premises of corporate strategy
• Competitions occurs at business-unit level
• Being part of diversified company involves inevitable costs for business units (HR)
o Often underestimated
o High turnover when acquisition
• Corporate strategy must produce a clear and offsetting gain in the competitive advantage of
business units
o Must exceed that available through alternative governance structures
find more resources at oneclass.com
find more resources at oneclass.com
• Ex: alliances, contracts
• This: central issue is: how can a corporation make its businesses more competitive?
o By guiding what mix of businesses the company is in
o By dictating how the businesses are integrated
o
Levels of diversification
o Wrigley Co: gum business
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Midterm: based on theory, not cases in class: disney: entertainment (theme parks and film production), but also other products, diversified company. Two strategy levels: business-unit level strategy (competitive) (ch. 4 & 5: what are the drivers of industry profitability, how can a firm create competitive advantage, corporate-level strategy (company-wide) (ch. Forward with disney stores (used to let distribution to other companies: another ex, budweiser. International expansion: make their own can, by backward integrating, expansion into multiple geographic markets to leverage investments in tangible and intangible markets. Instances where international expansion doesn"t involved going into different industry/market (not always diversification: pharmaceutical industry: rely on same label, distributors, customers. Levels of diversification: wrigley co: gum business, reasons for firm diversification can be classified into 3 primary groups. Incentives to diversify: resources required to create value through diversification, tangible resources (financial, plant, equipment), more visible to rivals and hence, subject to imitation.
