COMPETITIVE STRATEGY4.docx

COMPETITIVE STRATEGY4.docx

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COMPETITIVESTRATEGY4

II

StrategicDecisions

PartIIIdrawsontheanalyticalstructureinPartItoexamineeachmajortypeofstrategicdecisionthatoccursinanindustry:

•verticalintegration（Chapter14）;

•majorcapacityexpansion（Chapter15）;

•entry（Chapter16）.

Divestment,theothermajortypeofstrategicdecision,isconsideredindetailinChapter12,whichanalyzestheproblemsofcompetingindecliningindustries.

EachchapterinPartIIIdrawsontheconceptsinPartIthatrelatetotheparticularstrategicdecisionunderexamination.Partillalsointroducesadditionaleconomictheoryandadministrativeconsiderationsofmanagingandmotivatinganorganizationthatrelatetoeachtypeofstrategicdecision.

PartIIIisdesignednotonlytohelpthefirmmakethesestrategicdecisionsitselfbutalsotogiveitinsightintohowitscompetitors,customers,suppliers,andpotentialentrantsmightresolvethem.ThusitreinforcesanddeepensconceptspresentedinPartsIandII.

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14

TheStrategicAnalysisofVerticalIntegration

Verticalintegrationisthecombinationoftechnologicallydistinctproduction,distribution,selling,and/orothereconomicprocesseswithintheconfinesofasinglefirm.Assuch,itrepresentsadecisionbythefirmtoutilizeinternaloradministrativetransactionsratherthanmarkettransactionstoaccomplishitseconomicpurposes.Forexample,afirmwithitsownsalesforceinsteadcouldhavecontracted,throughthemarket,anindependentsellingorganizationtosupplythesellingservicesitrequires.Similarly,thefirmminingtherawmaterialsitfabricatesintoendproductscouldhavecontractedanindependentminingorganizationtosupplyitsneeds.

Intheory,allthefunctionswenowexpectacorporationtoperformcouldbeperformedbyaconsortiumofindependenteconomicentities,eachcontractingwithacentralcoordinator,whichitselfneedbelittlemorethanadeskandasinglemanager.Infact,segmentsofthebookpublishingandrecordingindustriestakeapproximatelythisform.Manypublisherscontractforeditorialservices,layout,graphics,printing,distribution,andselling,retainingforthefirmlittlemorethandecisionsaboutwhichbookstopublish,marketing,andfinance.Somerecordingcompaniessimilarlycontractwithindependentartists,producers,recordingstudios,disc-pressing300

TheStrategicAnalysisofVerticalIntegration301

facilities,anddistributionandmarketingorganizationstocreate,manufacture,andselleachrecord.

Inmostsituations,however,firmsfinditadvantageoustoperformasignificantproportionoftheadministrative,productive,distributive,ormarketingprocessesrequiredtoproducetheirproductsorservicesin-houseratherthanthroughcontractswithaseriesofindependententities.Theybelievethatitischeaper,lessrisky,oreasiertocoordinatewhenthesefunctionsareperformedinternally.

Manyverticalintegrationdecisionsareframedintermsofthe"makeorbuy"decision,focusingonthefinancialcalculationssuchadecisionentails.1Thatis,theyarepreoccupiedwithestimatingthecostsavingsofintegrationandbalancingthemwiththeinvestmentrequired.However,theverticalintegrationdecisionismuchbroaderthanthis.Theessenceoftheverticalintegrationdecisionisnotthefinancialcalculationitselfbutratherthenumbersthatserveastherawmaterialforthecalculation.Thedecisionmustgobeyondananalysisofcostsandinvestmentrequirementstoconsiderthebroaderstrategicissuesofintegrationversususeofmarkettransactions,aswellassomeperplexingadministrativeproblemsinmanagingaverticallyintegratedentitythatcanaffectthesuccessoftheintegratedfirm.Theseareveryhardtoquantify.Itisthemagnitudeandstrategicsignificanceofthebenefitsandcostsofverticalintegration,bothindirecteconomictermsandindirectlythroughitsaffectontheorganization,thataretheessenceofthedecision.

Thischapterexaminestheeconomicandadministrativeconsequencesofverticalintegration,inordertohelpthemanagerdeterminetheappropriatedegreeofverticalintegrationinastrategiccontextandtoguidedecisionstoverticallyintegrateordisintegrate.Tofindthestrategicallyappropriateextentofverticalintegrationforthefirmrequiresbalancingtheeconomicandadministrativebenefitsofverticalintegrationwiththeeconomicandadministrativecosts.Thisbalance,aswellastheparticularcostsandbenefitsthemselves,willdiffergreatlydependingontheparticularindustryandontheparticularstrategicsituationofthefirm.Thebenefitsandcostsarealsoaffectedbywhetherthefirmadoptsapolicyoftaperedintegration（producingsomeofitsownrequirementsinternallyandcontractingfortherest）orfullintegration.Also,manyofthebenefitsofintegrationcansometimesbegainedwithouti