MGT 510 Corporate Strategy and Vertical Integration Discussion

SEU_MGT510
Critical Thinking Assignment Rubric – Module 9
Exceeds
Expectation
Content, Research, and Analysis
17-20 Points
Requirements
Includes all of the
required
components, as
specified in the
assignment.
29-35 Points
Content
Demonstrates
substantial and
extensive
knowledge of the
Case Study with no
errors or major
omissions.
29-35 Points
Analysis
Provides strong
thought, insight,
and analysis of
concepts and
applications.
5 Points
Sources
Sources go above
and beyond
required criteria
and are well
chosen to provide
effective
substance and
perspectives on
the issue under
examination.
Mechanics and Writing
9-10 Points
Demonstrates
Project is clearly
college-level
organized, well
proficiency in
written, and in
organization,
proper format as
grammar and
outlined in the
style.
assignment.
Demonstrates
strong sentence
and paragraph
structure, contains
no errors in
Meets Expectation
Below Expectation
Limited Evidence
13-16 Points
Includes most of
the required
components, as
specified in the
assignment.
22-28 Points
Demonstrates
adequate
knowledge of the
Case Study; may
include some
minor errors or
omissions.
22-28 Points
Provides adequate
thought, insight,
and analysis of
concepts and
applications.
4 Points
Sources meet
required criteria
and are adequately
chosen to provide
substance and
perspectives on the
issue under
examination.
12-9 Points
Includes some of
the required
components, as
specified in the
assignment.
14-21 Points
Demonstrates fair
knowledge of the
Case Study and/or
includes some
major errors or
omissions.
14-21 Points
Provides poor
though, insight,
and analysis of
concepts and
applications.
3 Points
Sources meet
required criteria
but are poorly
chosen to provide
substance and
perspectives on the
issue under
examination.
5-8 Points
Includes few of the
required
components, as
specified in the
assignment.
6-13 Points
Fails to
demonstrate
knowledge of the
Case Study and/or
includes many
major errors or
omissions.
6-13 Points
Provides little or no
thought, insight,
and analysis of
concepts and
applications.
1-2 Points
Source selection
and integration of
knowledge from
the course is
clearly deficient.
7-8 Points
Project is fairly well
organized and
written and is in
proper format as
outlined in the
assignment.
Demonstrates
reasonably good
sentence and
paragraph
structure, may
5-6 Points
Project is poorly
organized and
written and may
not follow proper
format as outlined
in the assignment.
Demonstrates
inconsistent to
inadequate
sentence and
paragraph
3-4 Points
Project is not
organized or well
written and is not
in proper format as
outlined in the
assignment.
Demonstrates poor
quality work and is
unacceptable in
terms of grammar,
spelling, APA style,
SEU_MGT510
Critical Thinking Assignment Rubric – Module 9
grammar, spelling,
APA style, or APA
citations and
references.
Total points possible = 105
include a few
minor errors in
grammar, spelling,
APA style, or APA
citations and
references.
development,
and/or includes
numerous or major
errors in grammar,
spelling, APA style
or APA citations
and references.
and APA citations
and references.
CONTEMPORARY STRATEGY ANALYSIS
tenth edition
Robert M. Grant
John Wiley & Sons Ltd., 2019
Chapter 9
Technology-based Industries
and the Management of
Innovation
1
Technology-based Industries and the
Management of Innovation
OUTLINE
•
Competitive Advantage in Technology-intensive Industries
•
Strategies to Exploit Innovation: How and When to Enter
•
Standards, Platforms, and Network Externalities
•
Platform-based Markets
•
Implementing Technology Strategies: Internal and External
Sources of Innovation
•
Implementing Technology Strategies: Creating the
Conditions for Innovation
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
The Development of Technology: from
Knowledge Generation to Diffusion
IMITATION
Supply side
Basic
Knowledge
Invention
Innovation
Diffusion
Demand side
ADOPTION
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
Compressing the Technology Cycle: Less
Lag between Invention and Commercialization
BASIC KNOWLEDGE
FIRST
PATENTS
PRODUCT
LAUNCH
IMITATION
Jet Engines
17th century
Newtonian physics
1930
1957
1959
Xerography
Late 19th, early 20th
centuries
1940
1958
1974
Fuzzy logic
controllers
1960’s
1981
1987
1988
Automobile
satellite
navigation
Late 1950s
Early 1960s
1998
2002
MP3 players
Early 1990s
1994
1997
1999
Instant
messaging
Late 1980s
2002
2008
2009
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
Appropriation of Value: How are the
Benefits from Innovation Distributed?
Customers
Suppliers
Innovator
Imitators and
other
“followers”
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
Appropriating Value: Who Gets
the Benefits from Innovation?
ASPARTAME
PERSONAL COMPUTERS
SMARTPHONES
Customers
Suppliers
Innovator
Customers
Followers
© 2016 Robert M. Grant, www.contemporarystrategyanalysis.com
Followers
Customers
Complementors
Suppliers
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
The Profitability of Innovation
Profits
from
innovation
Value of the
innovation to
users
• Legal protection
Innovator’s
ability to
appropriate the
value of the
innovation
• Complementary
resources
• Imitability of the
technology
• Lead time
Copyright © 2019 John Wiley & Sons, Inc.
6
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
Legal Protection of Intellectual Property
•
Patents
— exclusive rights to a new product,
process, substance or design.
•
Copyrights
— exclusive rights to artistic, dramatic,
and musical works.
•
Trademarks
— exclusive rights to words, symbols
or other marks to distinguish goods
and services; trademarks are
registered with the Patent Office.
•
Trade Secrets
— protection of chemical formulae,
recipes, and industrial processes.
Also: employment contracts may restrict employees’ freedom to
transfer technology and know how.
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
Complementary Resources
Manufacturing
Finance
Distribution
Core
technological
know-how
Service
Complementary
technologies
Marketing
Other
Other
Bargaining power of owners of complementary resources
depends upon whether complementary resources are generic
or specialized.
© 20106 Robert M. Grant,
www.contemporarystrategyanalysis.com
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
U.S. Managers’ Perception of the Effectiveness of
Different Mechanisms for Protecting Innovation
Product innovations
Food
Drugs
Electronic components
Telecom equipment
Medical equipment
All industries
Process innovations
Food
Drugs
Electronic components
Telecom equipment
Medical equipment
All industries
Copyright © 2019 John Wiley & Sons, Inc.
Secrecy
(%)
Patents
(%)
Lead-time
(%)
Sales/service Manufacturing
(%)
(%)
59
54
34
47
51
51
18
50
21
26
55
35
53
50
46
66
58
53
40
33
50
42
52
43
51
49
51
41
49
46
56
68
47
35
49
51
16
36
15
15
34
23
42
36
43
43
45
38
30
25
42
34
32
31
47
44
56
41
50
43
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
Why Do Firms Patent?
(Responses by 674 US manufacturers)
Copyright © 2019 John Wiley & Sons, Inc.
STRATEGIES TO EXPLOIT INNOVATION: HOW AND WHEN TO ENTER
Alternative Strategies for Exploiting Innovation
Licensing
Risk &
Return
Strategic
Alliance
Joint
Venture
Reduces
investment,
but means
dependence
on suppliers &
partners
Benefits of
flexibility and
speed, but
coordination
risks
Few
Allows outside
resources &
capabilities
To be
accessed
Permits pooling of the
resources/capabilities of more
than one firm
Substantial
resource
requirements
ARM licenses
its microprocessor
designs to
several semiconductor
Apple
oursources
manufacture
to Foxconn
Apple and
Nike
collaborate to
develop
intelligent
footwear
Page and Brin
establish
Google Inc. to
commercialize
their search
algorith
Copyright © 2019 John Wiley & Sons, Inc.
Reduces
investment
and risk, but
partner
disagreement
likely
Internal
Commercialization
Low risk, but
limited returns
(unless patent
position very
strong
Competing
Resources
Examples
Outsourcing
certain
functions
Tesla and
Panasonic
jointly build
gigafactory for
lithium ion
batteries
Biggest risks
and benefits.
Allows complete
control
STRATEGIES TO EXPLOIT INNOVATION: HOW AND WHEN TO ENTER
The Timing of Innovation: To Leader or to Follow?
Product
Innovator
Follower
The winner
Jet airliner
Float glass
X-ray scanner
Office PC
VCRs
Instant camera
Microwave oven
Video games player
Disposable diaper
Compact disk (CD)
Web browser
Web search engine
MP3 music players
Operating systems for
mobile devices
Cryptocurrencies
Flash memory
E-book reader
Social networking
De Havilland (Comet)
Pilkington
EMI
Xerox
Ampex/Sony
Polaroid
Raytheon
Atari
Procter & Gamble
Sony/Philips
Netscape
Lycos
Diamond Multimedia
Symbian, Palm OS
Boeing (707)
Corning
General Electric
IBM
Matsushita
Kodak
Samsung
Nintendo/Sony
Kimberley-Clark
Matsushita, Pioneer
Microsoft
Google
Apple (iPod)
Apple, Google
Follower
Leader
Follower
Follower
Follower
Leader
Follower
Followers
Leader
Leader
Follower
Follower
Follower
Followers
Bitcoin
Toshiba
Sony (Digital Reader)
SixDegrees.com
Etherium, Ripple
Samsung, Intel
Amazon (Kindle)
Facebook
Leader
Followers
Follower
Follower
STRATEGIES TO EXPLOIT INNOVATION: HOW AND WHEN TO ENTER
To Lead or to Follow? Some Key Considerations
Can the innovation be protected by
intellectual property rights or leadtime advantages?
How important are complementary
resources?
Is there potential to establish an
industry standard ?
Copyright © 2019 John Wiley & Sons, Inc.
If so, advantages in leadership
• Followers can avoid investing
in complementary resources
by using better-established
industry infrastructure
• Firms possessing
complementary resources
have the luxury of waiting
If so, advantages in leadership
STRATEGIES TO EXPLOIT INNOVATION: HOW AND WHEN TO ENTER
Uncertainty & Risk Management in Tech-based Industries
Technological
uncertainty
Sources of
uncertainty
Market
uncertainty
Difficult to predict the evolution of
Technology or which standards and
designs will emerge is dominant
Customer adoption of innovations
notoriously difficult to predict
Cooperate with lead users
—early identification of customer needs
—assistance in new product development
Strategies for
managing risk
Flexibility
—keep options open
—adapt quickly to new information
—learn from mistakes
Limit risk exposure
—avoid capital commitments
—outsource
—use alliances to access other firms’
resources & capabilities
—keep debt low
STANDARDS, PLATFORMS, AND NETWORK EXTERNALITIES
The Emergence of Standards
• Emergence of a dominant designs
– Model T in autos
– IBM 360 in mainframes
– Douglas DC3 in passenger aircraft
• Emergence of technical standards
– Emerge in industries where there are network
extremities
• Entrenchment of dominant designs and technical
standards
– Learning effects: incremental improvement of the
dominant design
– Switching costs
– Need for coordinated action by multiple players
Copyright © 2019 John Wiley & Sons, Inc.
STANDARDS, PLATFORMS, AND NETWORK EXTERNALITIES
Sources of Network Externalities
• Users linked within a network e.g.:
– Telephone systems—only value of telephone is connection to other
users
– On-line auction—value of auction depends on number of buyers and
sellers participating
[Also, social identification—the desire to conform encourages imitative
behavior]
• Availability of complementary products e.g.:
– Most smartphone apps written for iPhone and Android—Blackberry
and Windows dying for lack of apps
– In autos, more available spares and repairs for a Ford Focus or
Honda Accord than a Kia, Proton, or Lamborghini
• Economizing on switching costs e.g.:
– Office software (Microsoft Office vs. Lotus SmartSuite)
Copyright © 2019 John Wiley & Sons, Inc.
STANDARDS, PLATFORMS, AND NETWORK EXTERNALITIES
Companies that Own Technical Standards
Company
Product category
Standard
Microsoft
Intel
Sony/Philips
ARM (Holdings)
Oracle Corporation
Rockwell and 3Com
Qualcomm
PC operating systems
PC microprocessors
Compact disks
Microprocessors for mobile devices
Programming language for web apps
56K modems
Digital cellular wireless communication
Windows
x86 series
CD-ROM format
ARM architecture
Java
V90
CDMA
Adobe Systems
Common file format for creating and
viewing documents
Web page animation
Page description language for document
printing
Antilock braking systems
Acrobat Portable
Document Format
Adobe Flash
Post Script
IMAX Corporation
ABS and TCS (Traction
Control System)
Motion picture filming/projection system IMAX
Apple
Sony
Nissan, Toyota, PSA
Music downloading system
High definition DVD
Electric vehicle charging
iTunes/iPod
Blu-ray
CHAdeMO
Adobe Systems
Adobe Systems
Bosch
Copyright © 2019 John Wiley & Sons, Inc.
STANDARDS, PLATFORMS, AND NETWORK EXTERNALITIES
Competing for Standards:
Value Appropriation vs. Market Acceptance
Video Cassette Recorders
VHS
Betamax
Maximize
market
acceptance
Maximize
value
appropriation
IBM-PC
Apple
Mac
Personal Computers
Copyright © 2019 John Wiley & Sons, Inc.
STANDARDS, PLATFORMS, AND NETWORK EXTERNALITIES
Fighting Standards Wars
1.
Determine the potential for standards emergence—analyze
network externalities
2.
Assemble allies—enlist partners (customers, complementors,
competitors) to build a bandwagon
3.
Pre-empt the market—build user base quickly: enter early, attract
key customers, adopt penetration pricing
4.
Manage expectations—use launch and pre-launch publicity and
promotion to convince the market that you will be the winner
How can the winner sustaining the standard?
•
•
•
•
Don’t fall behind on technology
Ensure backward compatibility
Meet threat of disruptive technology by offering customers a
migration path
Reinforce standard with other resources—e.g. brand
What if you’re a loser?
Copyright © 2019 John Wiley & Sons, Inc.
(a) ensure compatibility
(b) go for niche
IMPLEMENTING TECHNOLOGY STRATEGIES:INTERNAL AND EXTERNAL
SOURCES OF INNOVATION
The Conditions for Creativity:
“Operating” and “Innovating” Organizations
Operating organization
Innovating organization
Structure
Bureaucratic: Specialization
and division of labor;
hierarchical control. Defined
organizational boundaries.
Flat organization with weak
hierarchical control. Taskoriented project teams. Fuzzy
organizational boundaries.
Processes
Emphasis on eliminating
variation (e.g. six-sigma). Topdown control. Tight financial
controls.
Emphasis on enhancing
variation. Loose controls to
foster idea generation. Flexible
strategic planning and financial
control.
Reward
systems
Financial compensation,
promotion up the hierarchy,
power, and status symbols.
Autonomy, recognition, equity
participation in new ventures
People
Recruitment and selection
based on need for specific
skills: functional and staff
specialists, general
managers, and operatives.
Seeking idea generators that
combine required technical
knowledge with creative
personality traits. Managers as
sponsors and orchestrators.
IMPLEMENTING TECHNOLOGY STRATEGIES:INTERNAL AND EXTERNAL
SOURCES OF INNOVATION
Organizational Initiatives to Stimulate Innovation
• Cross-functional new product development teams—highly
effective in integrating with specialized functional knowledge
•
Product champions—provide the direction and motivation
needed to link invention with commercialization, drive integration,
and counteract organizational inertia
• Buying innovation—if start-ups are best at initiating innovation
and established companies are rich in complementary
resources—innovation most effective where the latter acquire the
former
• Open innovation—the sharing of ideas and technical know-how
among firms
• Corporate incubators—specialized business development units
within established firms
Copyright © 2019 John Wiley & Sons, Inc.
IMPLEMENTING TECHNOLOGY STRATEGIES: ORGANIZING FOR INNOVATION
Innovation Modes
DISRUPTIVE
Requires
new
business
model
e.g. Google’s Android is an
open-source operating system,
but draws upon Google’s
expertise in sofgtware
development
ARCHITECTURAL
e.g. Kodak’s entry into digital
imaging required new
capabilities and a different
business model
ROUTINE
Leverages
current
business
model
RADICAL
e.g. Intel’s new microprocessors e.g. The major pharmaceutical
firms’ entry into biotechnology
deploy its existing design and
required new genetic
fabrication cappabiklities and
capabilities, but no change in
require no change in Intel’s
their existing business models
business model
Uses existing
technical capabilities
Copyright © 2019 John Wiley & Sons, Inc.
Requires new
technical capabilities
CONTEMPORARY STRATEGY ANALYSIS
tenth edition
Robert M. Grant
John Wiley & Sons Ltd., 2019
Chapter 10
Vertical Integration and the
Scope of the Firm
1
Vertical Integration and
the Scope of the Firm
OUTLINE
• Transaction Costs and the Scope of the Firm
• The Benefits and Costs of Vertical Integration
• Designing Vertical Relationships
Copyright © 2019 John Wiley & Sons, Inc.
TRANSACTION COSTS AND THE SCOPE OF THE FIRM
From Business Strategy to Corporate
Strategy: The Scope of the Firm
• Business Strategy is concerned with how a firm
computes within a particular market
• Corporate Strategy is concerned with where a firm
competes, i.e. the scope of its activities
• The dimensions of scope are:
– vertical scope
– geographical scope
– product scope
Copyright © 2019 John Wiley & Sons, Inc.
TRANSACTION COSTS AND THE SCOPE OF THE FIRM
Multiple specialist firms vs. integration within a single firm
Specialized firms
Vertical
scope:
Electric
cars
LG (Battery)
Ford
Focus
Electric
Magna (Drivetrain)
Ford (Final assembly)
Product
scope:
Entertainment
Nintendo (Video games)
Panasonic (Consumer electronics)
MGM (Movies)
Geographical
scope:
Banking
Wells Fargo (US)
Lloyds Banking Group (UK)
Banco Bradesco (Brazil)
Single integrated firm
T
E
S
L
A
Drivetrain
S
O
N
Y
Video games
Consumer
electronics
Movies
H
S
B
US
UK
Brazil
C
Battery
Assembly
+ other countries
TRANSACTION COSTS AND THE SCOPE OF THE FIRM
The changing scale and scope of large US companies
Top 100
companies’
share of
total
employme
nt (%)
Expanding Scale and Scope
• scale economies from new
technologies
• new management tools
• multidivisional structure
• computers
• international expansion
Railways,
canals, and
telegraph
expand firms
geographical
reach
Copyright © 2019 John Wiley & Sons, Inc.
Second Industrial
Revolution: Growth
of industrial giants
assisted by
electricity, the
telephone,
innovations in
management and
organization
Consolidation
through mergers
and acquisitions
Quest for scale and
market dominance
in both mature and
hi-tech sectors
Restructuring, Refocusing and
Downsizing:
• Quest for shareholder value:
focus on core competences and
core businesses
• Turbulent business
environment: inflexibility of
large, complex hierarchies
• Digital revolution
THE COSTS AND BENEFITS OF VERTICAL INTEGRATION
The Benefits of Vertical Integration
• Technical economies from integrating processes e.g. iron
and steel production
—but doesn’t necessarily require common ownership
• Avoids transactions costs of market contracts in situations
where there are:
— small numbers of firms
— transaction-specific investments
— opportunism and strategic misrepresentation
— taxes and regulations on market transactions
• Superior coordination
Copyright © 2019 John Wiley & Sons, Inc.
7
THE COSTS AND BENEFITS OF VERTICAL INTEGRATION
The Costs of Vertical Integration
• Differences in optimal scale of operation between different
stages of production prevent balanced vertical integration
• Inhibits development of distinctive capabilities
• Difficulties of managing strategically different businesses
• Incentive problems: lack of “high-powered” incentives
• Limits flexibility
— in responding to demand fluctuations
— in responding to changes in technology,
customer preferences, etc.
(But, may be conducive to system-wide flexibility)
• Compounding of risk
Copyright © 2019 John Wiley & Sons, Inc.
THE COSTS AND BENEFITS OF VERTICAL INTEGRATION
Vertical Integration v. Outsourcing: Key Considerations
Characteristics of the vertical relationship
Implications for VI
How many firms in the adjacent stage?
The fewer the number, the less advantageous is VI
Do transaction-specific investments
necessary?
The greater the need for transaction-specific
investments, the greater the advantages of VI
Is information evenly distributed
across the stages?
The greater are information asymmetries, the
greater the advantages of VI
Is there uncertainty over the period of
the relationship?
The greater the uncertainty, the more incomplete is
the contract and the greater the advantages of VI
How similar is optimal scale between
the two stages?
How strategically similar are the two
stages?
The greater the dissimilarity, the less advantageous
is VI
Do capabilities in the adjacent stage
need to be continually upgraded?
The greater the need for capability development the
greater the disadvantages of VI
Are profit incentives critical to
performance?
The greater the need for high-powered incentives
the greater the disadvantages of VI
Is market demand uncertain?
Unpredictable demand reduces advantages of VI
Is the adjacent stage highly risky?
VI tends to compound risk
THE COSTS AND BENEFITS OF VERTICAL INTEGRATION
The Value Chain for Steel Cans
Iron ore
mining
Steel
production
Steel strip
production
Can
making
VERTICAL
INTEGRATION,
AND MARKET
CONTRACTS
VERTICAL
INTEGRATION
MARKET
CONTRACTS
Canning of
food, drink,
oil, etc.
MARKET
CONTRACTS
What factors explain why some stages are vertically integrated,
while others are linked by market transactions?
Copyright © 2019 John Wiley & Sons, Inc.
DESIGNING VERTICAL RELATIONSHIPS
Long-Term Contracts and
Quasi-Vertical Integration
• Choices not limited to vertical integration or arms-length
market contracts:
— Several intermediate types of vertical relationship: these
may combine benefits of both market transactions and
internalization
• Key issues in designing vertical relationships:
— No generic solution: depends upon the resources,
capabilities and strategy of the individual firm
— How is risk to be allocated between the parties?
— Are the incentives appropriate?
Copyright © 2019 John Wiley & Sons, Inc.
DESIGNING VERTICAL RELATIONSHIPS
Different Types of Vertical Relationship
High
Long-term
contracts
Formalization
Franchises
Joint
ventures
Agency
agreements
Spot sales/
purchases
Informal
supplier/
customer
relationships
Low
Low
Copyright © 2019 John Wiley & Sons, Inc.
Supplier/
customer
partnerships
Degree of Commitment
Vertical
integration
High
DESIGNING VERTICAL RELATIONSHIPS
Recent Trends in Vertical Relationships
• From competitive contracting to supplier partnerships, e.g. in
autos
• From vertical integration to outsourcing (not just
components, also IT, distribution, and administrative
services).
• Diffusion of franchising
• Technology partnerships (e.g. IBM- Apple; Canon- HP)
• Inter-firm networks
General conclusion:- boundaries between firms and markets
are becoming increasingly blurred.
Copyright © 2019 John Wiley & Sons, Inc.

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