having strong ties between their assets for which no market prices exist However, like other strategies that create value and aid the firm in achieving strategic competitiveness, vertical integration may not be the perfect answer because of risks and costs that accompany it. Outside suppliers may be able to provide inputs at a lower cost (and, possibly also of a higher quality). The costs of coordinating vertically integrated activities may exceed the value of the control realized. Vertical integration may result in the firm losing strategic competitiveness if the internal unit does not keep up with changes in technology. To vertically integrate, the firm may need to build a facility with capacity that exceeds the ability of its internal units to absorb, forcing the selling unit to sell to outside users in order to achieve scale economies. Many manufacturing firms no longer pursue vertical integration. In fact, deintegration is the focus of most manufacturing firms, such as Intel and Dell, and even among large automobile companies, such as Ford and General Motors, as they develop independent supplier networks. Solectron Corp., a contract manufacturer, represents a new breed of large contract manufacturers that is helping to foster this revolution in supply-chain management. Such firms often manage their customers’ entire product lines, and offer services ranging from inventory management to delivery and after-sales service. E-commerce allows vertical integration to turn into “virtualintegration,” permitting closer relationships with suppliers and customers through electronic means of integration. This lets firms reduce transaction costs while boosting supply-chain management skills and tightening inventory control. Simultaneous Operational and Corporate Relatedness As Figure 6.2 suggests, some firms simultaneously seek operational and corporate relatedness to create economies of scope. Because simultaneously managing two sources of knowledge is very difficult, such efforts often fail, creating diseconomies of scope. 5 Explain the two ways value can be created with an unrelated diversification strategy.UNRELATED DIVERSIFICATIONFirms implementing unrelated diversification strategies hope to create value by realizing financial economies, which are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm. Financial economies are realized through internal capital allocations (that are more efficient than market-based allocations) and by purchasing other companies and then restructuring their assets.Efficient Internal Capital Market AllocationAlthough capital generally is efficiently distributed in a market economy through the capital markets, large diversified firms may be able to distribute capital more efficiently to divisions and thus create value for the overall organization. This generally is possible because: BUSINESS POLICYLEARNING NOTES
Chapter 6: Corporate-Level Strategy 6-6
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