UTRGV Southwest Airlines Corporate Strategies Case Study

Diversification and
Integration
Sibin Wu, PH.D.
UTRGV
Strategies
Strategies: means by which long-term objectives will be
achieved.
There are three levels of strategies:
Corporate: integration, diversification
Division (business): Porter’s three strategies (Ryanair)
Functional (operational): purchasing materials, HR.
Strategies
Functional strategies refer to those relating to each of the
business functions. For example, you can recall you have
learned marketing strategy and financing strategy.
And we also discussed divisional strategies, such as variety based
strategy (Ryanair).
Now we move to corporate strategies.
• First, diversification.
• What product comes to your mind when you think about GE?
Learn about GE. What are their key businesses?
http://www.ge.com/
Diversification strategy
• Diversification: A corporate strategy to enter into a new industry which
the business is not currently in.
• We all know GE manufactures appliances, refrigerators, microwaves
and so on. Do you know they also make aircraft engines, CT scans,
and they do financing too. That is called diversification.
•
• In the discussion, you are going to find that Toyota also owns roof
gardens businesses. Why?
Roof Garden
• Toyota owns some roof gardens. Why so? Demand?
• Please check the following and see how space can be a luxury for
people in Tokyo.
• https://www.youtube.com/watch?v=pRBLnth4oSg
Types of Diversification
• Concentric
New and related products/services for present customers
• Horizontal
New and unrelated products/services for present customers
• Conglomerate
New and unrelated products/services for new customers
Types of Diversification
• Single-business
95% of revenue from one business
• Dominant-business
70-95% of revenue from one business
• Related
Less than 70% from one business & different businesses
sharing many links and attributes
• Unrelated
Less than 70% from one business and different businesses
sharing few links
Profitability and Diversification
Profitability
Relationship between
profitability and diversification
single
related
unrelated
Should companies diversify?
You need to have strategic assets defined as unique and unassailable
competitive strengths and the nature of those strengths.
• Toyota diversifies into housing market.
• Should GM do so too?
• You need to answer a few questions.
Diversify or not
• What can our company do better than any of its competitors
in its current market?
• What strategic assets (most important for diversification) do
we need in order to succeed in the new market?
• Can we catch up to or leapfrog competitors at their own
game?
• Will diversification break up strategic assets that need to be
kept together?
• Will we be simply a player in the new market or will we
emerge a winner?
• What can our company learn by diversifying, and are we
sufficiently organized to learn it?
Motives for diversification
Operating economies of scope
Shared activities, and core competence
Financial economies of scope
Internal capital allocation
Risk reduction, tax advantages
Anticompetitive economies of scope
Multipoint competition
Exploiting market share (both)
Employee incentives
Diversifying employees’ human capital investment
Maximizing management compensation (both)
Purpose of diversification: Creating
value
• Able to apply skills and knowledge to another partner
• Related operation to reduce long-term cost
• Generate resources to outperform competitors
• Related products to reduce risks
• Allocation of money within
• Obtain cash to sponsor growing business
• Lower cost of debt and enhance leverage
Integration: Make or Buy
• Another corporate strategy is Integration.
• Transaction cost theory argues that a company makes
decisions if they should produce everything themselves or if
they should buy from other suppliers. For example, a phone
company needs to make a decision to have their own
operating system or microprocessor (chip) or they buy from
suppliers like Intel.
• To make this decision, companies need to consider: internal
cost and external cost
Economies of Integration
• Integration means high degree of internal transfers of goods.
• Integration can potentially reduce cost
Reduce transaction cost (finding suppliers, contracting with them
and transporting the products to your company)
Increase coordination within the firm (Don’t need to talk to
suppliers, need only to talk with your colleagues)
Create power over suppliers (reduce information asymmetry,
avoid supply shortage)
Problems with integration
• Need bureaucracies to coordinate the internal transferring
goods
Size of the organization
Communication distortion
Away from core business=manage unknowns
Less pressure=more slack, inefficiency
Keep failing divisions
When integration works
• Expense from internal transfer < expense from market
exchange
Expense from internal transfer
Low ratios of R&D, advertising, other selling expenses
over sales
Expense due to market exchange
High ratios of production cost, and
general
administrative expense over sales
Types of Integration
• Forward integration
Control over distributors and retailers
• Backward integration
Control over suppliers
• Horizontal integration
Control over competitors
For case analysis (100 points)
Criteria
Exceeds
Expectations
Meets
Expectations
Doesn’t
Completely
Meet
Expectations
Unacceptable
Performance
Content of
assignment
Covers the
assignment facts
and questions in
exemplary fashion,
shows deep and
broad analysis to
reach conclusions,
explains
conclusions fully
with no resulting
questions
Exceeds
expectations to
include precise,
concise editing,
word choice and
organization as
suggested in
lectures and
support
documents
No misspelling or
grammatical
errors based on
APA or MLA style
manual
Covers the
assignment facts
and questions in
adequate fashion,
shows analysis to
reach conclusions,
explains
conclusions fully
Fails to cover the
assignment facts
and questions
completely, shows
little analysis to
reach conclusions,
explains
conclusions
Fails to cover the
assignment facts
and questions,
shows no analysis
to reach
conclusions,
shows no
conclusions
Meets
expectations to
include precise,
concise editing,
word choice and
organization as
suggested in
lectures and
support
documents
A few misspellings
or a few minor
grammatical
errors based on
APA or MLA style
manual
On time
submission
Fails to meet
expectations to
include precise,
concise editing,
word choice and
organization as
suggested in
lectures and
support
documents
Many misspellings
or grammatical
errors based on
APA or MLA style
manual
Fails in all aspects
of effective and
efficient
assignment
implementation
30%
Execution of
assignment
30%
Spelling/Grammar
30%
Submission by
Deadline
10%
Fails in all aspects
of effective and
efficient
assignment
implementation
Late submission

Purchase answer to see full
attachment