Diversification, Integration and Outsourcing

Welcome to Global
Strategy and
Topic: Corporate Strategy –
Diversification, Integration and Outsourcing

Today’s Agenda
Quick Recap of Previous Week’s Topic (Global strategy)
Corporate strategy level
Horizontal integration
• Activity 1: Individual – CASE STUDY: The growth strategy of Google
Vertical integration, outsourcing and strategic alliances
• Activity 2 Group: Competing through forward integration: the future of Apple retail
Diversification: related and unrelated expansion
• Activity 3: Group – CASE STUDY – The role of corporate parenting in managing conglomerates: the
case of LVMH
The case for diversification and profitability
• Review of Apply Activity
• Recap, Q&A, Discussion
• Next steps

Previous Week Recap – Global strategy
Examine the process of globalisation and how it impacts a
company’s strategy
Analyse and discuss the motives for expanding internationally
Recommend the different strategies a company can use to
compete in the global market
Evaluate the pros and cons of different models for entering
foreign markets

Today’s Learning Outcomes
Evaluate horizontal integration in the context of corporate
level strategy
Evaluate the role of vertical integration, outsourcing and
strategic alliances
Construct the case of how diversification can increase
Analyse the concepts of related and unrelated diversification

Corporate level strategy
Corporate strategy and scope of business activities
This Photo by Unknown Author is licensed under CC BY
Corporate strategy is mainly
concerned with the scope of
the firm’s business areas
Market scope:
it concerns markets, including the different
geographies, a firm should focus on
Product scope:
it relates to the range of products a firm
should specialise in

Corporate strategy and Ansoff’s matrix
size from
500ml to
Diet Pepsi
Flavour drink: Cherry drink
Chip market
Source: The Business Teacher (2018)
Corporate strategy: methods of development
Strategy Market penetration
Market development
Strategy within industry
Market development
Strategy outside industry
Market penetration Strategy
Market penetration Strategy
Product development Strategy
Source: De Wit (2020)
Horizontal integration
Horizontal integration
Source: Adapted from Corporate Finance Institute (n.d.)
Horizontal integration is the
development/acquisition of a business
operating at the same level of the value chain
where firms expand
outside their current
Vertical integration
expansion happens
within the
value chain

The basic drivers of horizontal integration
Economies of scale. The
same activities can be
carried out at a lower cost.
Marriott acquisition of Starwood (Sheraton)
Cost synergies in marketing,
combined product base, and
shared technology.
Disney acquisition of Lucas film, Pixar and Marvel
Reduce competition, acquiring
firms whose products are
complementary in nature.
Acquisition of NabeWise by Airbnb, basis
to launch Airbnb Neighbourhoods service

Horizontal integration: benefits and risks

Benefits Example
Cost and financial synergies 1998 $75.3-billion merger between
Exxon and Mobil, the No. 1 and No. 2
US oil companies.
Reduced competition 2014, Facebook announced it would
pay $19 billion to acquire WhatsApp.
Access to new markets 2016 Microsoft’s $26.2-billion
acquisition of LinkedIn.


Risks Example
Antitrust issues 2019. The proposed merger between
Sainsbury’s and Asda was blocked by
the UK’s competition watchdog.
Integration issues 1998, Daimler-Benz announced a $36
billion merger with the Chrysler
Corporation. 2007, Daimler Chrysler
sold 80.1% of Chrysler to a private
equity firm.

Individual Activity: Case Study
The growth strategy of Google
This Photo by Unknown Author is licensed under CC BY-SA
Vertical integration,
outsourcing and
strategic alliances

Vertical integration: directions and levels
Source Grant (1998)
Backward integration
movement into input
activities concerned with
the company’s current
Forward integration
movement into output
activities concerned with
the company’s current

Vertical integration: Reduce risk – BP case
“Vertically integrated” oil groups combine the upstream activities of finding and developing oilfields
with downstream functions such as refining crude and selling petroleum products.
The collapse in crude prices began in mid-2014, low prices hit revenue from
oil and gas production, but refining and chemicals businesses helped
supporting integrated BP group revenue.

Vertical integration: Increase efficiency – ZARA case
In apparel, a vertical manufacturer is one who produces and sells their own products. From fabric
sourcing and design to manufacturing, distribution and sales, integrated apparel companies gain high
levels of efficiency in their supply chains.
Zara is able to deliver
a piece of cloth from
design to the shop in
just 25 days, all done
in-house, compared to
3-6 months of nonintegrated

Vertical integration: Increase control – Tesla case
Outsourced car manufacturing was a
trend driven by the core competenceoriented business strategies
implemented by many car
manufacturers during the 1990s.
It is estimates that Tesla has achieved about
80% vertical integration
in its manufacturing supply chain.
Tesla is going one stage further by expanding
the value chain to the charging stage (car
manufacturers do not own gas stations).

Competing through vertical integration
Vertical integration is one of the most powerful ways to compete:
• Lower costs and increase the stability of supply of an important input.
• Products and services can improve as a result of talent from the different
workforces sharing ideas and collaborating more closely.
• Collaboration can lead to the development of new products and innovation.
• Companies with different structures can share their strengths and cover each
other’s weaknesses.
• Eliminate double marginalisation. Combining companies reduces the number of
times, along a supply chain, that a company tries to price above the market.

Competing through vertical integration: Martech
“Martech” applies to major initiatives, efforts and tools that harness technology
to achieve marketing goals and objectives.
The most powerful
companies in
marketing’s digital
channel are arguably
those who are fully
vertically connected:
Facebook and

Group activity: Case Study
Competing through forward integration: the
future of Apple retail
This Photo by Unknown Author is licensed under CC BY-SA
Break Time – 15 minutes
Integrate or outsource?
• bookkeeping or payroll
• marketing
• administrative tasks
• human resources
• customer service
When a part of vertically
integrated operations is not adding
value to the overall business
• manufacturing
• distribution
• shipping and logistics
• research and development
• IT services
Reasons/benefits for
(subcontract- offshoring)
Risks of outsourcing
1. Complex contracts between companies with possible hidden costs
2. Access to confidential data can cause security threats or data breaches
3. Communication challenges that cause project delays and slower turnaround time
4. Language and cultural barriers
5. Little control over quality from the originating company
6. Less knowledge of the industry or domain
7. Public backlash or moral dilemmas

Outsource: Successful cases

Outsourcing area Example
R&D From 2001, welcomed ideas from individual entrepreneurs
and scientists from other companies and universities. The
goal was to gain half the ideas from outside the company.
Software development Alibaba used outsourcing of development to the US
because the skills and experience required to build the
world’s largest online marketplace were scarce in China
but available in North America.
Service support In 2011, around a thousand outsourced reps around the
globe were entrusted with providing client support via
phone and email for Google AdWords.
Manufacturing Nike has no manufacturing plants of its own but chooses
to outsource the work to contractors in the Philippines,
Vietnam, China, Indonesia, and Taiwan. 500,000 people
worldwide are involved in the production of Nike footwear.

Strategic alliances as an alternative to M&A
Strategic alliances are collaboration between firms with
partial or no changes of ownership
Equity alliances
Creation of a new entity that is owned
separately by the partners involved
(e.g., Joint Venture)
Since 2009, Panasonic and Tesla initially entered
an Electric Vehicles batteries supply agreement.
Panasonic invested $30 million (equity) in Tesla.
Non-equity alliances
Relationship without the commitment implied
by ownership, often based on contracts.
(e.g., Franchise)
When Apple released the Apple Pay system for
contactless transactions, MasterCard was the first
company to partner with Apple.

Strategic alliances: benefits and examples

Development area Example
Market entry BA, AA, Finnair and Iberia teamed up across USA, Canada,
Mexico and Europe to enhance service to passengers.
Gain competitive
PepsiCo formed a joint venture in 1991 with the Thomas J. Lipton
Co. to market ready to-drink teas throughout the United States.
Then in 2003, a second joint venture (PepsiCo and Unilever).
In 2014 these two joint ventures formed a new leadership team:
Pepsi Lipton
Synergistic effects
of shared
knowledge and
Renault and Nissan became strategic partners in 1999, with
Mitsubishi joining later. The Alliance covers all vehicle segments
and technologies, across all geographies.
Sharing risks and
Chevron and Toyota announced in April 2021 their first step
towards a strategic alliance to commercialise hydrogen.

Diversification: related and
unrelated expansion

Diversification occurs
when an organisation
moves into areas that are
clearly differentiated from
its current businesses
New markets
New products
Reasons for a firm to diversify:
• Current markets at point of saturation or decline
• Excess cash that can be invested elsewhere more
• Synergy is possible from new business
• Antitrust regulations prohibit expansion in present
• The international sector can be entered quickly
• Technical expertise can be gained quickly
• Attract new and experienced executives or hold
on to existing executives

Related diversification
Related diversification involves
diversifying into products or
services where a company
already operates or into the
businesses with some
* Horizontal diversification:
new product for its existing
* Concentric diversification:
new and correlated products in a
new market.
Divisions’ operations are related through shared competitive
advantages, such as the company’s strong brand.
Revenue in 2019:
$69 billion

2019-2023 average growth
Unrelated diversification
Unrelated diversification occurs
when merges or acquisitions of
companies without any
commonalities, no overlap in
markets, distribution channels,
or production technology.
Conglomerates are good examples
of unrelated diversification
Industrial conglomerate that markets over 60,000
products used in more than 200 countries. 3M is a highly
diversified company with five main business segments
that cover over 45 technology platforms.
Revenue in 2019:
$32 billion

Group Activity: CASE STUDY – The role
of corporate parenting in managing
conglomerates: the case of LVMH
This Photo by Unknown Author is licensed under CC BY-SA
Source: www.thefashionlaw.com
The case for diversification
and profitability

Will diversification truly create shareholder value?
Michael Porter proposes three “essential tests”
1. The attractiveness test: The industries chosen for diversification must be
structurally attractive or capable of being made attractive.
2. The cost-of-entry test: The cost of entry must not capitalise all future profits.
3. The better-off test: Either the new unit must gain competitive advantage from
its link with the corporation, or vice versa.
The practical difficulties faced by “parental” management of exploiting
opportunities, have made diversification a corporate minefield

Portfolio management and diversification
Identify and acquire another corporation, divesting lowperforming businesses within it and intervening to improve
the performance of those with potential.
The BCG matrix uses market share
and market growth criteria for
determining the attractiveness and
balance of a business portfolio.
This Photo by Unknown Author is licensed under CC BY-SA
Boston Consulting Group
(BCG) Growth/share matrix

Portfolio management: BCG matrix
• Global re-launch of Lipton Yellow Label that
fuelled growth of 5.6% between 2012 – 2014.
• Marmite is a key Cash Cow for Unilever with
sales just about holding their own.
• The excess profit from brands like Marmite
reinvested into new innovative brands like T2.
• Unilever sold its Slim-Fast brand in July 2014
to private-equity firm, Kainos Capital,
BCG Growth/share matrix for Unilever
This Photo by Unknown Author is licensed under CC BY-NC
Portfolio management: GE matrix
Businesses with the highest growth potential and the greatest strength are
those in which to invest for growth. Those that are the weakest and in the
least attractive markets should be divested or ‘harvested’ .
The directional policy matrix positions
business units according to:
(i) how attractive the relevant market is,
(ii) the competitive strength of the SBU
in that market.
The directional policy
(GE– McKinsey) matrix

Conclusion: M&A, alliances or organic,
which one is the best?
Source: Johnson (2017)
• How urgent is the need for expansion?
• What is the uncertainty in terms of the markets or
technologies involved?
• What type of capabilities are involved? Hard or soft?
• How modular are the capabilities (distinct sections or
Four factors can help in choosing
between acquisitions, alliances and
organic development:

Review of Apply

Apply Activity Instructions
Discussion Forum (100 words)
Apply the learning from the prepare section by engaging with these questions and answering and
discussing them within the discussion forum.
Provide an example of a firm which has used either horizontal integration, vertical integration, outsourcing
or a strategic alliance and explain why they have been successful or unsuccessful
What key factors need to be considered when a firm is considering diversification?

Assessment Instructions
For this assessment, in the role of a Management Consultant, you are required to undertake an overall strategy
review of Tesla and provide a business report and a PowerPoint presentation to the CEO on further growth
opportunities using the techniques and concepts you have covered in the module. Background reading has
been provided for the case study which you can access via links on the HUB and via the core textbook also.
The business report comprises of 4 tasks (this task is part of both formative and summative assessments):
LO2: Critically evaluate both strategic direction and strategic options in complex business environments.
Task 3 – Corporate Strategy (15 Marks)
• Evaluate and critically analyse the use of horizontal integration, vertical integration, outsourcing or
strategic alliances.
• Provide recommendations as to how Tesla can increase their profitability.
Support your arguments with academic literature and references to other similar real companies.
Recap, Q&A,

Key Takeaways
You should now be able to:
• Evaluate horizontal integration in the context of
corporate level strategy
• Evaluate the role of vertical integration, outsourcing
and strategic alliances
• Construct the case of how diversification can increase
• Analyse the concepts of related and unrelated

Next Steps
• Review this topic
• Go through the Preparation and Apply part of this week (if
not done yet)
• Go through the Consolidation part of this week
• Go through the Preparation and Apply part of next week
Prepare Task 3 of your Assessment
• See you next week same time!