Corporate Strategy: Vertical Integration & Diversification

Core Competencies, Economies of Scale, Economies of Scope, Transaction Costs

Whether Costs in-house < Costs market

Lowers costs, Improves quality, Facilitates scheduling and planning, Facilitates investments in specialized assets, Secures critical supplies and distribution channels

Increase in costs, Reduction in quality, Reduction in flexibility, Increase in potential legal repercussions

Taper Integration or Strategic Outsourcing

Where to compete?

The two primary drivers are 'make vs. buy' factors and cost-benefit analysis. The 'make vs. buy' decision is influenced by factors such as transaction costs, asset specificity, and the availability of suppliers, while cost-benefit analysis considers the trade-offs between the costs of vertical integration and the benefits of increased control and efficiency.

The relationship between diversification and performance is characterized by an inverted U-shape, implying that moderate levels of diversification are associated with the highest levels of performance. The optimal level of diversification is where the benefits of diversification (e.g., reduced risk, increased opportunities) are balanced against the costs (e.g., increased complexity, reduced focus).

The three types of strategic alliances are non-equity alliances, equity joint ventures, and build-borrow-or-buy frameworks. The choice between these types depends on factors such as the level of resource commitment, the degree of control desired, and the level of risk tolerance.

The two primary methodologies are the price-to-earnings (P/E) ratio method and the discounted cash flow (DCF) method. The P/E ratio method is simpler and more widely used, but may not capture the complexity of the target company's financial situation, while the DCF method is more accurate but requires more advanced financial modeling skills.

The advantages of a global strategy include increased market access, reduced costs, and improved competitiveness, while the disadvantages include increased complexity, cultural and administrative barriers, and potential loss of focus. Firms can address these challenges by using the CAGE distance framework to assess the cultural, administrative, geographic, and economic differences between markets.

The primary go-to-market options are exporting, licensing, franchising, and greenfield investment. The choice between these options depends on factors such as the level of market access, resource commitment, and control desired, as well as the level of risk tolerance and the firm's internal capabilities.