Study Notes on Vertical Integration, Diversification, Outsourcing, Corporate Parenting, and Strategic Frameworks

Value Network Concepts

  • Vertical Integration

    • Brings together activities up and down the same value network.
    • Advantages include increased profit capture across the value chain.
    • Risks:
      • Requires substantial investment which may not be attractive to shareholders if not profitable.
      • Management of different activities may require distinct strategic capabilities.

  • Diversification

    • Involves activities across different value networks.

    • Related diversification is similar to horizontal integration.

    • Example: A car manufacturer diversifying into trucks and buses.

    • Benefits of Diversification

      • Integration of design and component sourcing can lead to efficiencies.

Outsourcing vs. Integration

  • Outsourcing

    • Process where activities previously done internally are contracted out to external suppliers.
    • Commonly applied in manufacturing components and service activities like IT and HR.

  • Strategic Reasons for Outsourcing

    • Specialist suppliers may have superior capabilities in specific activities.
      • Example: An IT contractor typically has better capabilities than an internal IT department of a non-IT company.

  • Management Decision Factors: Integrate or Outsource?

    • Will the subcontractor produce a significantly better product/service over time?
    • Is there a risk of the subcontractor exploiting the relationship?

Case Study Example

  • Scenario: A mining company providing housing for employees in an isolated location.
    • Consideration: Does outsourcing housing add value or detract from it?
      • Benefits may include cost reduction, but could also destroy value.

Corporate Parenting Value Addition

  • Corporate Parents' Value Creation

    • Must demonstrate that they create more value than they cost to survive against rivals.
    • The principle of corporate parents mirrors that of individual business units needing a competitive advantage.

  • Five Main Value-Adding Activities by Corporate Parents:

    1. Visioning

      • Establishing a clear vision/strategic intent to guide business units towards maximizing performance.
      • Provides stakeholders clarity on what the organization represents and reassures shareholders regarding diversification.

    2. Facilitating Cooperation

      • Encouraging sharing and synergy between business units through incentives and rewards.

    3. Developing Strategic Capabilities

      • Coaching and developing business unit managers through management courses, enhancing skills and networks.

    4. Providing Shared Services & Resources

      • Centralized services deliver economies of scale and can consolidate purchasing power.
      • Facilitate resource sharing and improve knowledge management.

    5. Performance Monitoring

      • Closely overseeing business unit performance and intervening where necessary.
      • Tasks include performance enhancement or management replacement.

Value Destruction by Corporate Parents

  • Corporate parents can inadvertently destroy value through:
    • Increased operational costs from shared services.
    • Bureaucratic complexities adding layers to decision-making, slowing responses.
    • Lack of transparency obscuring underperformances within diversified units, reducing accountability for individual business managers.

Management Dynamics and Cooperation

  • If corporate intervention is overly aggressive, it may impact business unit managers negatively, leading to performance focus on individual unit success rather than collaborative synergy.

Types of Managers in Corporate Structures

  • Portfolio Managers

    • Tasked with identifying undervalued assets and improving or divesting them.
    • Operate on short time frames to optimize business value.

  • Synergy Managers

    • Focus on creating value through cooperative efforts, fostering collaboration amongst units.
    • Example: Steve Jobs’ vision as a guiding force across multiple Apple product lines.

  • Parental Developers

    • Utilize existing resources to enhance business units that aren’t performing optimally.

Strategic Decision Frameworks

  • BCG Matrix (Boston Consulting Group)

    • Also known as the Growth-Share Matrix, it focuses on market growth and market share to assess business portfolio attractiveness.
    • Quadrants of BCG Matrix:
      1. Stars
      • High market share in a growing market; self-sufficient investments due to sufficient profits.
      1. Question Marks (Problem Children)
      • Growing market but low market share; requires significant investment for potential growth.
      1. Cash Cows
      • High market share in a mature market; lower growth demands but high profitability.
      1. Dogs
      • Low share in stagnant or declining markets; often considered for divestment due to resource drain.

  • Benefits of BCG Matrix:

    • Provides visual assessment of business portfolio needs and potential.
    • Incorporates financial demands with market growth dynamics.
    • Reminds of product and industry cycle impacts.

  • Limitations of BCG Matrix:

    • Issues with definitions of market share and growth.
    • Potential misunderstandings due to narrow definitions of markets or external factors affecting performance.