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Chapter 9

SGMT 3000 Chapter Notes - Chapter 9: Federal Trade Commission, Quasi, Horizontal Integration


Department
Strategic Management
Course Code
SGMT 3000
Professor
T B A
Chapter
9

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Chapter 9 Corporate-Level Strategy: Horizontal Integration, Vertical Integration, and Strategic
Outsourcing
Overview
- Corporate-Level Strategy Decisions: deciding business and industries the firm should compete in;
selecting the value creation activities to be performed in those businesses; determining how to enter,
consolidate, or exit businesses or industries to increase long-term profitability; enable company to
sustain or promote a competitive advantage in current business and in any new ventures
- Role of Managers: think long-term; consider how changes in industry, product, technology,
customers and competitors will affect firm’s current business model and future strategies;
decide
Corporate-Level Strategy & the Multi-Business Model
- Corporate-Level Strategies: drive business model over time; determine business- and functional-level
strategies taken to maximize long-term profits; should allow company or business unit to perform value-
chain activities at a lower cost and/or in a way that increases differentiation; pricing depends on
corporate-level strategy chosen; promote success of business-level strategies, achieve sustainable
competitive advance, create higher profitability
- Multi-Business Model: business model for entry into new businesses or industries; explain how and
why entering a new industry will increase overall profitability using existing competencies and strategies
Horizontal Integration: Single-Industry Corporate Strategy
- Single Industry Advantages: company can focus all managerial, financial, technological, functional
resources and capabilities on competing successfully in that one area; when industry is fast-growing and
changing, demands on resources and capabilities likely to be strong, but potential profits can be
substantial; company stays focused on what it knows and does best; avoid entering industry where little
value is created by existing resources and capabilities; avoids entering an industry with new competitive
industry forces and unanticipated threats
- Single Industry Challenges: changing market conditions and customer needs make it difficult to sustain
a successful business model over time; managers may focus too much on positioning current products,
that they ignore the potential for new products or market opportunities;
- Corporate-Level Strategy: allows managers to anticipate future trends; managers can change
business models towards a changing environment
- Horizontal Integration: process of acquiring or merging with industry competitors to achieve
competitive advantages that arise from a large size and scope of operations; significantly improves
competitive advantage and profitabilities of companies whose managers focus on value creation within
one industry
- Acquisition: company uses capital (stock, debt, cash) to purchase another company
- Merger: agreement between equals to pool their operations and create a new entity
- Benefits: lowers cost structure; increases product differentiation; leverages competitive
advantage more broadly; reduces industry rivalry; increases company bargaining power
- Lower Cost Structure: increases economies of scale; firms able to spread fixed costs
over a large volume, decreasing unit costs; lower cost structure when company can
reduce the duplication of resources between two firms, but cost savings often
overestimated

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- Increased Product Differentiation: improve flow of innovative new products a company
can sell to its customers; company can combine product lines of merged companies to
offer bundles of products; company can cross-sell its products
- Product Bundling: customers given opportunity to purchase multiple products
for a single combined price; increases value of product line since price discounts
are realized; customers grow accustomed to transacting with only one
company; source of competitive advantage
- Cross-Selling: company leverages established relationships with customers by
acquiring additional product lines or categories that it can sell to them;
company increases differentiation by being the source of a total solution;
company able to satisfy a group of specific needs; customers save time and
money, do not have to work with multiple suppliers; company able to increase
its market share
- Leverage Competitive Advantage: can increase profitability if distinctive competencies
can be valuably deployed across multiple market segments or geographies
- Reduced Industry Rivalry: mergers and acquisitions eliminate excess capacity which
would otherwise trigger price wars, stabilizing the market environment; easier to
implement tacit price coordination between fewer competitions; the fewer competitors
that exist, the easier it becomes to create informal pricing agreements
- Tacit Price Coordination: price coordination attained without communication
- Increased Bargaining Power: can influence suppliers or buyers more strongly; can
increase profitability at expense of suppliers and buyers; company can control a greater
percentage of an industry’s product or output, making customers more dependent;
increased market power results from the ability to raise prices to buyers and bargain
down input prices
- Problems: implementation is difficult; different company cultures, high management turnover
when acquisition is hostile, overestimations on benefits and underestimations on problems can
lessen the changes of increased profitability from horizontal integration; can run into problems
with the Federal Trade Commission (FTC), merger or acquisition can be blocked
- Federal Trade Commission (FTC): government agency that enforces antitrust laws;
concerned with abuse of market power; recognize that increased competition improves
consumption ability; prevents large firms from making further acquisitions that would
allow them to raise consumer prices above a level that would exist in a more
competitive situation, seen as an abuse of market power; prevents dominant companies
from using market power to crush potential competitors
Vertical Integration: Entering New Industries to Strengthen the “Core” Business Model
- Vertical Integration: company expands operations either backward into an industry that produces
inputs or forward into an industry that uses, distributes, or sells the products; company enters industries
that support business model of its core industry; can either set up its own operations or acquire another
company already in that industry
- Core Industry: industry that is the primary source of competitive advantage and profitability
- Multi-Business Model & Vertical Integration: must explain how entry will enhance long-term
profitability; model based on company entering industries that add value to core products by
increasing differentiation or lowering cost structures
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