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ChapterCase : How Amazon.com Became the Everything Store
8.1 What Is Corporate Strategy? (LO 8-1, LO 8-2)
8.2 The Boundaries of the Firm (LO 8-3)
CONNECT INTEGRATION
Video Case: Scope of the Firm
8.3 Vertical Integration along the Industry Value Chain (LO 8-4, LO 8-5, LO 8-6)
CONNECT INTEGRATION
Case Analysis: Vertical Integration
8.4 Corporate Diversification: Expanding Beyond a Single Market (LO 8-7, LO 8-8)
CONNECT INTEGRATION
Interactive Labeling: Corporate Diversification and Firm Performance
8.5 Implications for the Strategist
Strategy Term Project
CONNECT INTEGRATION
HP Running Case: Module 8
my
Strategy
Chapter 8
Corporate Strategy: Vertical Integration
and Diversification
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POWERPOINT SLIDES 1–6
Firms must decide in which industries and global markets to compete, and understand that these choices are likely to change
over time. Answers to these important questions are captured in a firm’s corporate-level strategy. In this chapter, the first of
three on corporate strategy, we define corporate-level strategy and then look at two fundamental corporate-level strategy
topics: vertical integration and diversification. We will also cover make–or-buy decisions and identify when diversification
can aid the firm in gaining a competitive advantage.
Learning Objectives
LO 8-1 Define corporate strategy and describe the three dimensions along which it is assessed.
LO 8-2 Explain why firms need to grow, and evaluate different growth motives.
LO 8-3 Describe and evaluate different options firms have to organize economic activity.
LO 8-4 Describe the two types of vertical integration along the industry value chain: backward and
forward vertical integration.
LO 8-5 Identify and evaluate benefits and risks of vertical integration.
LO 8-6 Describe and examine alternatives to vertical integration.
LO 8-7 Describe and evaluate different types of corporate diversification.
LO 8-8 Apply the core competence–market matrix to derive different diversification strategies.
LO 8-9 Explain when a diversification strategy creates a competitive advantage and when it does
not.
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ChapterCase
POWERPOINT SLIDES 57–58
Case update: In November 2015, Amazon announced the opening of its first brick-and-mortar store in a mall in
Washington. Ask students whether they believe that expansion of this chain risks damaging Amazon’s
competitive advantage by burdening it with the costs of its more traditional rivals. (See “Amazon to open first brick–
and-mortar store” G Bensinger 11/2/15 The Wall Street Journal.)
CONSIDER THIS DISCUSSION QUESTIONS
Amazon.com continues to spend billions on seemingly unrelated diversification efforts. Do you believe these
efforts contribute to Amazon gaining and sustaining a competitive advantage? Why or why not?
Amazon.com is now over 20 years old and makes some $100 billion in annual revenues. As an investor, would it
concern you that Amazon.com has yet to deliver any profits? Why or why not? How much longer do you think
investors will be patient with Jeff Bezos as he continues to pursue billion-dollar diversification initiatives?
One of the most profitable business endeavors that Amazon pursues is its cloud service offering—AWS. In 2014, AWS
revenues were an estimated $6 billion, but bringing in $1 billion in profits. What is Amazon’s core business? Is AWS
related to Amazon’s core business? Why or why not? Some investors are pressuring Jeff Bezos to spin out AWS as a
standalone company. Do you agree with this corporate strategy recommendation? Why or why not? Hint: Do you
believe AWS would be more valuable within Amazon or as a standalone company?
Investors like “pure plays” especially when businesses have radically different margins, growth rates, and growth prospects.
As all three of these issues apply to Amazon’s situation, a split would be in investors’ best interest. Although Amazon’s
END OF CHAPTER SMALL GROUP EXERCISE 2
POWERPOINT SLIDES 62–63
In your small group, discuss any potential ethical issues with Amazon paying the university administration for direct
access into the campus’s course textbook system.
I don’t really see any ethical issues, other than the fact that the universities may have contractual obligations or verbal
commitments of exclusivity to firms that have built brick-and-mortar stores on or near campus. Students already heavily use
While Amazon as a firm continues to diversify its products, services, and markets under one corporate umbrella, why
do firms such as Barnes & Noble choose to split into separate firms for greater focus on each piece of the business? Do
these different strategies align with the core competencies of each? It may be helpful to review Exhibit 8.9.
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If your team was asked to consult for Barnes & Noble Education, which corporate strategies would you recommend to
the company’s senior leadership?
The big challenge for instructors in this question is to push the students to think like Jeff Bezos or like investors, not like the
8.1 What Is Corporate Strategy? LO 8–1
POWERPOINT SLIDES 7–9
EXAMPLE
POWERPOINT SLIDE 8
NEWER FACULTY: Consideration is given to the three dimensions of corporate strategy. The dimensions are NOT
independent of each other and, as noted in the “Consider This…” extension to the chapter opener, they can either reinforce
each other or conflict with one another. We find it valuable here in Chapter 8 to note that we are finally at the part of strategy
POWERPOINT SLIDE 9
As an example, take the computer-technology company Oracle, whose core competency lies in enterprise software. Oracle
engaged in related diversification through backward vertical integration into computer hardware by acquiring Sun
Microsystems, and forward vertical integration into human resource management systems (HRMS), and customer-relations
management (CRM) software by acquiring PeopleSoft. In its corporate strategy, moreover, Oracle pursues related as well as
END OF CHAPTER DISCUSSION QUESTION 1
POWERPOINT SLIDE 8
When Walmart decided to incorporate grocery stores into some locations to create “supercenters,” was this a business–level
strategy of differentiation or a corporate-level strategy of diversification? Why? Explain your answer. AACSB 2015 Standard
9 Application of knowledge (able to translate knowledge of business and management into practice)
We discussed business-level strategies in Chapter 6. The argument for differentiation is somewhat valid if you consider the
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EXERCISE
POWERPOINT SLIDE 9
Walt Disney Company is a firm with which students are familiar that provides a good example of all three elements of
corporate strategy. Ask students to review the firm’s portfolio of businesses and identify examples of geographic
diversification, industry diversification, and vertical integration. Then ask them to identify competences that are being
$B
2014
2013
2012
13 vs. 12
Revenues
$B
$B
$B
%
Media Networks
21
20
19
5
Parks and Resorts
15
14
13
9
Studio Entertainment
7
6
6
3
Consumer Products
4
4
3
9
Interactive
1
1
1
26
Total
49
45
42
7
Net Income
Media Networks
7
7
7
3
Parks and Resorts
3
2
2
17
Studio Entertainment
2
1
1
–8
Consumer Products
1
1
1
19
Interactive
0
0
0
60
Total
13
11
10
8
8.1 What Is Corporate Strategy? LO 8–2
POWERPOINT SLIDES 10–11
EXAMPLES
Growth gives a firm many advantages, such as greater appeal to top talent, lower cost and greater access to equity capital and
debt financing, and attractiveness to the best potential alliance partners. McKinsey Quarterly published a study on the
importance of growth to firm survival and found these results: “From 1983 to 2013, for instance, roughly 60 percent of the
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DISCUSSION TOPICS
Yahoo’s business (ChapterCase 2) has been in decline for several years and Ms. Mayer is striving to find growth
opportunities that will reverse that trend (see “Yahoo’s turnaround woes mount” D MacMillan 10/20/15 The Wall Street
8.2 The Boundaries of the Firm LO 8–3
POWERPOINT SLIDES 12–19
EXAMPLES
POWERPOINT SLIDE 13
NEWER FACULTY: Exhibit 8.2 illustrates internal and external transaction costs. Transaction cost economics is a powerful
yet relatively simple framework that explains much about the underlying causes of why firm boundaries are established
within markets.
POWERPOINT SLIDE 13
NEWER FACULTY: Some students are not comfortable with the term “transaction cost economics,” but the idea it portrays is
actually not too difficult to understand. In many ways, we face make–or-buy decisions all the time and choose based on our
often unexpressed understanding of the trade–offs. “I will stop to buy fast food on the way home from school because I want
to spend my time at home making study cards for my upcoming exam.” This simplistic example says in essence, I’m going to
buy my food so that my time is spent creating cognitive learning for a more successful outcome on my exam tomorrow.
POWERPOINT SLIDE 14
As illustrated by the lemons example, information asymmetries in markets can lead to perverse effects. Applying this insight
to the market for collaborative R&D projects in biotechnology, empirical research supports the lemons hypothesis. In
POWERPOINT SLIDES 15–16
NEWER FACULTY: Exhibit 8.3 may be important to spend a few minutes on depicting the advantages and disadvantages of
firms versus markets. While terms such as information asymmetries sound difficult, the foundational concepts are pretty
simple and are certainly important for students to understand. You might want to work through a simple example for students
POWERPOINT SLIDE 18
NEWER FACULTY: Exhibit 8.4 offers important insights for students with limited work experience. They have a clear
understanding of the two ends of the diagram—buy or make in-house, but the intermediate alternatives are less obvious.
Firms often structure their businesses using more than one of these options. For example, Starbucks has company owned and
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STRATEGY SMART VIDEO EXAMPLE
POWERPOINT SLIDE 70: THE BUSY SECRETARY
This video example may help students understand the concept of the principal-agent problem.
DISCUSSION TOPICS
Strategy Highlight 8.1
POWERPOINT SLIDE 19: IS COKE BECOMING A MONSTER?
In discussing this case, try to clearly divide the discussion into separate issues: (a) whether entering the energy drink business
is an ethical decision and consistent with Coke’s values and (b) the advantages of having this diversification occur as a
minority-owned joint venture versus a wholly owned business unit. Be sure students consider both the reputation issues and
the synergies with packaging, supply chain management, advertising expense, and retail distribution power.
END OF CHAPTER DISCUSSION QUESTION 3
POWERPOINT SLIDE 18
Franchising is widely used in the casual dining and fast food industry, yet Starbucks is quite successful with a large number
of company-owned stores. In 2014 Starbucks had over 7,000 company-owned stores in the United States. How do you
explain this difference? Is Starbucks bucking the trend of other food-service stores, or is something else going on?
Students may have several thoughts on this question. We expect most have been to a variety of fast-food restaurants and
END OF CHAPTER ETHICAL/SOCIAL ISSUES 2
POWERPOINT SLIDE 15
Nike is a large and successful firm in the design of athletic shoes. It could easily decide to forward-integrate to manufacture
the shoes it designs. Therefore, the firm has a credible threat over its current manufacturers. If Nike has no intention of
actually entering the manufacturing arena, is its supply chain management team being ethical with the current manufacturers
if the team mentions this credible threat numerous times in annual pricing negotiations? Why or why not? What aspects of
Nike’s agreement with its manufacturing partners do you believe they emphasize in negotiations? AACSB 2015 Standard 9
Ethical understanding and reasoning (able to identify ethical issues and address the issues in a socially responsible manner)
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Also, remember the idea of taper integration is that even after you start a new process internally, you still can maintain
external firms as well.
EXERCISE
POWERPOINT SLIDE 16
EXPERIENCED FACULTY: The production of many of our electronics requires access to “rare earth metals,” and there are
manufacturing industry. One such option is Toyota’s backward integration strategy; it focuses on the threat of backward
integration by the focal industry. Another strategic option is to reduce the amount of rare earth metals used in the car; it
addresses the criticality of the supplier’s product to the focal industry product. A third strategy is to design multiple types of
batteries that can be easily interchanged; this flexibility reduces switching costs. Students may have other ideas. AACSB
2015 Standard 9 Thinking creatively
INTEGRATION
Video Case Analysis: Scope of the Firm
This video case analysis gives students an opportunity to further explore the principal–agent problem and also the make-
or-buy continuum. The video topic covers transportation issues in large cities and thus also brings the role of government
into these questions. The video is about seven minutes long and has four embedded questions contained in it. Difficulty:
Medium Blooms: Apply AACSB: Analytic
Video Case Tips: We suggest setting the “attempts” policy to “revise the previous attempt” for video cases. This enables
students to watch parts of the video and edit their answers without needing to watch the entire video again for each
attempt at the questions.
Follow-Up Activity: The instructor can expand on the concepts in this video case by discussing Strategy Highlight 8.1
regarding Toyota’s efforts to secure supplies of the vital component of lithium for the growing number of hybrid (and
electric) cars. In graduate classes, instructors may want to discuss question 2 in the ethical/social issues section at the end
of the chapter. This vignette digs further into the management of supply chain and the possible use of credible threat by
the firm Nike.
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8.3 Vertical Integration along the Industry Value
Chain LO 8–4
POWERPOINT SLIDES 20–24
STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDE 68
The first 8 minutes of the video in this slide describes vertical integration.
EXAMPLES
NEWER FACULTY: In Chapter 4, we introduced the concept of the firm-level internal value chain. That internal value chain
depicts the activities the firm engages in to transform inputs into outputs, with activities ranging from basic R&D to customer
service. Internal, firm-level value chains are also called horizontal value chains. Thus, there are two intersecting value chains:
the industry value chain running vertically from upstream to downstream, and the firm-level value chain running
horizontally. In this chapter on corporate strategy, the one of interest is the vertical, industry value chain, portrayed in Exhibit
8.5.
POWERPOINT SLIDE 22
An example of vertical integration is steelmaker Nucor bought SHV North America, providing Nucor with global sourcing of
scrap materials for its innovative technology using electric-arc furnaces.
POWERPOINT SLIDE 22
An excellent example of vertical integration is the so-called integrated oil industry. Integration in this industry is generally
taper integration, as size and locational differences make a fully integrated oil business impractical. The different parts of the
POWERPOINT SLIDES 23 AND 24
NEWER FACULTY: Exhibit 8.6 offers an engaging illustration of the value chain for an industry. We find students often are
EXERCISE
POWERPOINT SLIDES 23, 24, AND 39
EXPERIENCED FACULTY: Alliance Boots GmbH is now owned 50 percent by Walgreens. The two companies then formed an
alliance with AmerisourceBergen, a pharmacy wholesaler, that has the potential to be converted to an equity joint venture.
Part 1: This example gives students an opportunity to draw out the industry value chain shown in Exhibit 8.6 for a different
industry. They should identify the research and manufacturing as occurring in pharmaceutical firms, such as Teva, Amgen,
and Merck, the distribution and wholesaling function happening in AmerisourceBergen, and the consumer marketing and
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8.3 Vertical Integration along the Industry Value
Chain LO 8–5
POWERPOINT SLIDES 25–28
DISCUSSION TOPICS
POWERPOINT SLIDES 25 AND 26
Why did Pepsi exit the bottling industry in 1999? Why did they buy back into this segment in 2009? Pepsi exited out of the
capital intensive, low margin bottling industry in 1999 to concentrate on marketing. In 2009 they bought their major bottlers
for $7.8 billion to obtain more control over its quality, pricing, distribution, and in-store display, to improve decision making,
and to enhance flexibility to bring innovative products to the market faster.
EXPERIENCED FACULTY: Google forward integrated into smartphone handset manufacture in 2012 with its purchase of
Motorola. In what ways does Google both compete with and supply its customers? In this example of co-opetition, Google
supplies Android software, search engine, and apps to smartphone manufacturers and designers, including Samsung. Google
is now in direct competition with these firms. What competencies does Google bring to the smartphone manufacturing
business? Google can’t match its smartphone competitors in manufacturing competencies. What it hopes to bring to Motorola
is improved innovation processes. (See “Samsung and Google: From friends to frenemies” 2/27/13 The Wall Street Journal
and “Motorola is now the Apple of Google’s eye” 5/24/12 The Wall Street Journal.)
Why does Ashley Furniture own its trucking operations? Most firms view trucking as an ideal area of value chain to
outsource. Using Exhibit 8.3, why does it make sense for some firms, like Ashley, to go their own way in making make-
versus-buy decisions? (See “A radical supply chain idea: Own your trucking operation” JR Hagerty 4/29/15 The Wall Street
Journal.)
INTEGRATION
Case Analysis: Vertical Integration
This activity builds student comprehension of vertical integration. Complementing the textbook discussion of HTC in the
smartphone industry, this case discusses Apple’s purchase of a semiconductor firm. The student must read the case
provided, as well as the relevant textbook section, and answer the five questions in this exercise. Difficulty: Medium
Blooms: Analyze AACSB: Analytic
Follow-Up Activity: The instructor can expand on the concepts from this interactive by discussing the benefits and risks
of vertical integration from the textbook. Deciding which operations to have inside the firm and which to use the market
system for are decisions that can have profound impacts on the performance of a firm in the long term, yet often they are
undertaken for short-term monetary reasons.
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8.3 Vertical Integration along the Industry Value
Chain LO 8–6
POWERPOINT SLIDES 29–30
DISCUSSION TOPICS
POWERPOINT SLIDE 30
This humorous video illustrates that outsourcing can go too far.
For an example of the disadvantages of vertical integration, consider Alcoa’s recent decision to separate its raw material
END OF CHAPTER ETHICAL/SOCIAL ISSUES 1
POWERPOINT SLIDE 30
The chapter notes that some firms choose to outsource their human resource management systems. If a firm has a
core value of respecting its employees and rewarding top performance with training, raises, and promotions, does
outsourcing HR management show a lack of commitment by the firm? HR management systems are software
applications that typically manage payroll, benefits, hiring and training, and performance appraisal. What are the
advantages and disadvantages of this decision? Think of ways that a firm can continue to show its commitment to
treat employees with respect. AACSB 2015 Standard 9 Social responsibility, including sustainability, and ethical behavior
and approaches to management
A firm can make the argument that outsourcing to full–time HR professionals who focus only on providing superb HR
services is indeed the best way to show respect for the employees of your firm. The text discusses strategic outsourcing and
8.4 Corporate Diversification: Expanding Beyond a
Single Market LO 8–7
POWERPOINT SLIDES 31–35
STRATEGY SMART VIDEO EXAMPLES
POWERPOINT SLIDES 32 AND 68: DELTA DENTAL COMMERCIAL
This humorous video showing examples of inefficient diversification is a light-hearted way to introduce the topic of
corporate diversification