Corporate strategy: vertical integration

Published on April 27, 2022   10 min

Other Talks in the Series: Key Concepts: Introduction to Strategy

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Hello and welcome to this series of introductory talks on business strategy. My name is Robert Grant. I'm a professor of strategic management at Bocconi University in Milan, Italy. I'm also the author of 'Contemporary Strategy Analysis', a leading strategic management textbook used in business programmes throughout the world.
In this talk, we are shifting our focus from business strategy to corporate strategy. In terms of what I want to achieve with this talk, the first thing is to comprehend this distinction. Corporate strategy is concerned with decisions over the scope of the firm. One of the dimensions of corporate scope is vertical integration. Then I would like you to appreciate the benefits and costs of vertical integration and be able to identify whether vertical integration or outsourcing is better under particular circumstances. Finally, I would like you to recognise the potential for hybrid arrangements. What is often called quasi-vertical integration, to combine the benefits of vertical integration and outsourcing. My talk will follow the same sequence. Starting off by explaining the distinction between business and corporate strategy, then considering the benefits and costs of vertical integration and the circumstances that determine the balance of these benefits and costs. Finally, examining hybrid arrangements to vertical integration that emerged in recent decades.
In this series, I noted that a firm strategy could be described in terms of the answers to two questions, how the firm competes and where it competes. These two questions also define two areas of strategy. Business strategy is concerned with how a firm competes within a particular industry or market. It is concerned with how the firm can establish a competitive advantage within that industry or market. Corporate strategy is concerned with where the firm competes. In other words, the scope of the firm's activities. This relates to its vertical scope, how far it extends along its value chain, its geographical scope, how local or international is the market that it serves and its product scope. How specialised or diversified are its offerings? The distinction between the two also corresponds to the organisational structure of large companies. Consider Sony Corporation. Corporate strategy is to preserve the corporate headquarters. Business strategy is mainly the responsibility of the divisions, such as the games division, music division or the motion picture division. The classic case for vertical integration