Week 5 Strategic Management Notes: Vertical Integration & Core Competence
Week 5 Strategic Management Notes: Vertical Integration & Core Competence STRT 4500
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This 3 page Class Notes was uploaded by Dominique LaSalle on Thursday September 22, 2016. The Class Notes belongs to STRT 4500 at University of Colorado Colorado Springs taught by Eric M. Olson in Fall 2016. Since its upload, it has received 5 views. For similar materials see Strategic Management in Business at University of Colorado Colorado Springs.
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Date Created: 09/22/16
Strategic Management Week 5 Notes The strategic analysis of vertical integration - Vertical integration can be considered in two dimensions - Forward v. backward along the distribution channel - Make vs. Buy Decisions o Typically made on a cost analysis o Porter argues that make vs. buy decisions should be based at least in part on the strategic implications and the administrative complexity (hard to quantify) - Volume of Throughput vs. Efficient Scale o If the firm’s needs do not exceed the scale of an efficient unit, the firm must either Build inefficient small facilities or, Build large efficient facilities and try to sell excess product on the open market o Firms in different parts of the distribution chain seldom have the same efficient scale requirements o Scale efficiencies frequently change due to a wide variety of economic criteria o These criteria may not affect all firms equally - Strategic Benefits of Vertical Integration o Economies of integration o Economies of combined operations o Economies of internal control and coordination o Economies of information o Economies of avoiding the market o Economies of stable relations o Tap into technology o Assure supply and/or demand o Offset bargaining power o Enhanced ability to differentiate o Elevate entry and mobility barriers o Enter a higher return business o Defend against foreclosure - Strategic costs of Integration o Cost of overcoming mobility barriers o Increased operation leverage o Reduced flexibility to change partners o Higher overall exit barriers o Capital investment requirements o Foreclosure of access to supplier or consumer research and/or know how o Maintaining balance o Dulled incentives o Differing managerial requirements (transfer pricing issues) - Issues in Forward Vertical Integration o Improved ability to differentiate product o Access to distribution channels o Better access to market information o Higher price realization - Issues in Backward Vertical Integration o Proprietary knowledge o Differentiation - Alternatives to Vertical Integration o Longterm contracts and the economics of integration When Vertical Integration risks are great, longterm contracting may be a superior way to achieve some of the benefits of Vertical Integration o Tapered integration Partial forward or backward vertical integration Fewer fixed costs Less risk Some access to outside R&D Give knowledge on how to operate in a new industry Firm may have to sell to competitors May actually increase coordination costs o QuasiIntegration Somewhere between longterm contracts and full ownership Minority equity investment Loans or loan guarantees Prepurchase credits Exclusive dealing agreement Specialized logistics facilities Cooperative R&D - Illusions in Vertical Integration Decisions o A strong market position in one stage can automatically be extended to the other o It is always cheaper to do things internally o It often makes sense to integrate into a competitive business o Vertical Integration can save a strategically sick business o Experience in one part of the vertical chain automatically qualifies managers to directupstream of downstream units The Core Competence of the Corporation “Core competencies are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.” - 3 Tests to Identify Core Competencies o Does the competency provide access to a wide variety of markets? o Does it make a significant contribution to the perceived customer benefits of the end product? o Is it difficult for competitors to imitate? - Limitations o Few companies will be able to develop more than 5 or 6 core competencies that pass these tests - Core products o Core products are links between core technologies and end products o To sustain leadership in a chosen core competence area firms seek to maximize their world manufacturing share of core products - Core Technologies o core technologies are the basic technologies employed in core products that make them distinctive and hard to imitate - End products o End products are the actual products purchased by consumers. They are comprised of various components including core products - Managerial Questions o How long could we preserve our competitiveness in this business if we did not control this particular core competence? o How central is the core competence to perceived customer benefits? o What future opportunities would be foreclosed if we were to lose this particular core competence? - Two Managerial Lessons o The cost of losing a core competence can only partially be calculated in advance o Because the development of core competencies may take a decade or longer, companies that fail to continuously improve and enhance product/technologies may find themselves unable to enter attractive new markets unless simply as a distributor
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