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Date Created: 05/21/14
Strategy Post Midterm Notes Chapter 6 39239 What is Corporate Strategy 9 Business Strategy Firm s theory of how to gain competitive advantage in a single business or industry 9 Corporate Strategy Firm s theory of how to gain a competitive advantage by operating in several businesses simultaneously 9 What is Vertical Integration 0 Value Chain Set of activities that must be accomplished to bring a product or service from raw materials to the point that it can be sold to a final customer 0 Vertical Integration level of The number of steps in this value chain that a firm accomplishes within its boundaries 0 Backward Vertical Integration When a firm incorporates more stages of the value chain within its boundaries and those stages bring it closer to the beginning of the value chain brings it closer to gaining access to raw materials 0 Forward Vertical Integration When a firm incorporates more stages of the value chain within its boundaries and those stages bring it closer to the end of the value chain brings it closer to interacting directly with final customers 6 The Value of Vertical Integration gt Strategy in Depth 9 Value added as a percentage of sales measures the percentage of a firm s sales that is generated by activities done within the boundaries of a firm Vertical integration value added I net income income taxes Salesi net income income taxes Value added depreciation amortization fixed charges interest expense labor and related expenses pension and retirement expenses income taxes net income after taxes rental expense gt Vertical Integration and the Threat of Opportunism 0 One of the best known explanations of when vertical integration can be valuable focuses on using vertical integration to reduce the threat of opportunism O Opportunism Exists when a firm is unfairly exploited in an exchange example a party expects a high quality of product and gets lower than expected 0 Firms should only bring market exchanges within their boundaries when the cost of vertical integration is less than the cost of opportunism O The treat of opportunism is greatest when a party to an exchange has made transaction specific investments 9 9 Transaction specific investment any investment in an exchange that has significantly more value in the current exchange that it does in alternative exchanges Transaction specific investments make parties vulnerable to opportunism and vertical integration solves this problem gt Vertical Integration and Firm Capabilities 9 First it suggests that firms should vertically integrate into those business activities where they possess valuable rare and costly to imitate resources and capabilities Second this approach also suggests that firms should not vertically integrate into business activities where they do not possess the resources necessary to gain competitive advantage gt Vertical Integration and Flexibility 9 9 Flexibility How costly is it for a firm to alter its strategic and organizational decisions Flexibility is high when the cost of changing strategic choices is low exibility is low when the cost of changing strategic choices is high In general vertical integrating is less exible than not vertically integrating Flexibility is only valuable when the decision making setting a firm is facing is uncertain Uncertain future value of an exchange cannot be known when investments in that exchange are being made Firms should form strategic alliance if it is highly uncertain Strategic alliances are more exible and you know the most you can lose is equal to the cost of creating and maintaining the alliance gt Applying the Theories to the Management of Call Centers I Transaction Specific Investments and Managing Call Centers 9 9 9 Start by looking for actual or potential transaction specific investments that would need to be made High levels of transaction specific investments suggest the need for vertical integration low levels of transaction specific investments suggest that vertical integration is not needed First developed in the 1980s gt Great deal of special purpose equipment had to be purchase with little value except within a call center gt Employees would have to be fully aware of all problems likely to emerge within the use of a firm s products complex training With information technology it is not necessary to vertically integrate call center management anymore I Capabilities and Managing Call Centers 9 Start by looking for valuable rare and costly to imitate rampc 9 9 Firms that developed special capabilities in managing processes could gain competitive advantages and thus would vertically integrate However as more suppliers were created and trainingtechnology was more available less source for competitive advantage I Flexibility and Managing Call Centers 9 Start by looking for sources of uncertainty gt Integrating Different Theories of Vertical Integration 9 9 0 Sometimes these explanations contradict each other but are usually complementary Gives three different ways to look at it v Vertical Integration and Sustained Competitive Advantage gt The Rarity of Vertical Integration 9 Can be rare because it is one of small number of competing firms able to vertically integrate efficiently or non vertically integrate efficiently I Rare Vertical Integration Rare Transaction Specific Investment and Vertical Integration 9 9 A firm may have developed a new technology or a new approach to doing business that requires the business partners to make substantial transaction specific investments If it is rare and costly to imitate they can be a source of competitive advantage Rare Capabilities and Vertical Integration 9 If the capabilities are valuable and rare then they should vertically integrate Rare Uncertainty and Vertical Integration 9 Firm may have competitive advantage if they were to resolve some uncertainty sooner than its competition I Rare Vertical Dis Integration 9 9 9 Decision to outsource an activity that used to be within the boundaries of the firm When a firm is among the first to conclude that the level of specific investment required is no longer high no longer rare or costly to imitate or uncertainty has increased Can create temporary competitive advantage at least gt The Imitability of Vertical Integration I Direct Duplication of Vertical Integration 9 Occurs when competitors develop or obtain the resources and capabilities that enable another firm to implement a valuable and rare vertical integration strategy gt Path dependent gt Socially complex gt Causally ambiguous I Substitutes for Vertical Integration 0 Strategic alliances refer to Chapter 9 Ackerman 6 Organizing to Implement Vertical Integration gt Organizational Structure and Implementing Vertical Integration 0 Same as cost leadership product differentiation U form or functional structure 0 CEO s responsibilities strategy formulation and implementation lead in making decisions about whether each individual function should be vertically integrated into a firm work to resolve con icts that natural arise between vertically integrated functions I Resolving Functional Con icts in a Vertically Integrated Firm 0 CEO almost always has to deal with con ict resolution gt Management Controls and Implementing Vertical Integration I The Budgeting Process 0 Developed for costs revenues and a variety of other activities performed by a firm s functional managers 0 Can lead functional managers to overemphasize short term behavior that is easy to measure and underemphasize longer term behavior that is more difficult to measure delay maintenance and training expenditures 0 CEO s can evaluate a functional manager39s performance relative to budgets when gt Process is used in developing budgets is open and participative gt Process reflects the economic reality facing functional managers and the firm gt Quantitative evaluations of a functional manager39s performance are augmented by qualitative evaluations of that performance I The Management Committee Oversight Process 0 Executive committee CEO and 2 or 3 key functional senior managers meets weekly and reviews the performance of the firm on a short term basis track the short term performance of the firm correct budget variances and respond to crisises or whatever the plural of crisis is 9 Operations committee CEO and heads of functional areas meets monthly track firm performance over time intervals longer than weekly interval of executive committee and monitor longer term strategic investments provides a forum in which senior functional managers come together and share concerns opportunities and coordinate efforts to implement strategy gt Compensation in Implementing Vertical Integration Strategies I Opportunism Based Vertical Integration and Compensation Policy 0 Employees who make firm specific investments in their jobs will often be able to create more value for a firm than employees who do not O Firm specific investments investments made by employees that have more value in a particular firm than in alternative firms ex employee39s understanding of a particular firm s culture 0 Employees are cautious about this due to vertical integration 9 Compensation policy works towards creating incentive I Capabilities and Compensation 9 Many valuable rare and costly to imitate rampc are due to firm specific investments 0 Focuses on firm specific investments made by groups of employees 0 May be costly to imitate because the resources are socially complex teamwork cooperation and culture I Flexibility and Compensation 9 Creation of exibility in a firm depends on employees being willing to engage in activities that have fixed and known downside risks and significant upside potential I Compensation Alternatives Opportunism Explanations Salary Cash bonuses for individual performance Stock grants for individual performance Capabilities Explanations Cash bonuses for corporate or group performance Stock grants for corporate or group performance Flexibility Explanations Stock options for individual corporate or group performance 9 Stock grants payments to employees in a firm s stock 0 Stock options employees are given the right not obligation to purchase stock at a predetermined price 0 9 Summary
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