Introduction
Companies choose different strategies to succeed in the market. After some time, many businesses see an opportunity for growth which can bring not only profit but also higher levels of recognition and stability. Vertical or horizontal integration, for instance, helps enterprises to acquire or be acquired by other firms. Diversification is another approach that allows businesses to venture into the new spheres of the market. Moreover, many companies implement global strategies which give them an opportunity to exist in the connected world. This work aims to compare horizontal and vertical integration, evaluate the viability of diversification, and assess the benefits that a global strategy can bring to a company.
Vertical and Horizontal Integration
Both horizontal and vertical types of integration are intended to provide companies with a more stable place on the market. Through the acquisition, businesses can either reduce their costs and strengthen their assets or increase their size and reach new markets and customers. According to Alfaro, Conconi, Fadinger, and Newman (2016), both types of integration can influence the state of the market significantly as they give businesses a chance to acquire the resources needed to be competitive. Thus, horizontal and vertical integration, while being different in their operations, serve the same purpose of raising one’s productivity and profitability.
While the two types of integration have their similarities, they also possess many differences. Horizontal integration, for example, deals with companies that acquire businesses functioning in a complementary or a competitive market (Editorial Board, 2015). This type of purchase is carried out to increase the size of one’s business, diversify its range of products and services, reduce or eliminate the competition, and reach new markets and clients.
It can be seen as a business expansion as companies usually acquire similar firms that perform the same operations. For example, the recent acquisition of a German pizza chain by Domino’s Pizza can be considered a horizontal integration of the company (Porter, 2015). As the author notes, Domino’s Pizza decided to broaden its reach to a different country and create a marketing presence with the already established foundation. This example shows that horizontal integration is valuable as it can provide a company with various growth opportunities.
Vertical integration, on the other hand, happens when a business acquires a company that stands either after or before in its supply chain. In this case, both sides of the deal perform different functions, and their integration allows one company to manage the operations of the other to strengthen its supply chain (Editorial Board, 2015). This type of integration can reduce the business’ costs and give it more benefits in the part of the market in which the acquired entity is active.
For example, Apple recently bought Faceshift, a company that develops motion-capture technology, in order to integrate the products of this business into their electronics (Williams, 2015). Here, it is a vertical integration that allows Apple to have a new source of technology that provides the existing products with a unique feature. Thus, the company can access any type of product without the interference of any third parties which makes vertical integration highly valuable.
Diversification
Diversification can serve as a viable strategy in two types of circumstances. First of all, the saturation of the market and the abundance of competitors can lead to a company leaving this market and venturing into a new sphere of business. However, a firm can choose to continue offering its existing products and direct its efforts towards a new unexplored area that is not filled with much competition. This situation can force a firm to consider diversification as it limits the company’s ability to succeed in the existing environment. According to Neffke and Henning (2013), the possibilities of a business to diversify may be limited by the skills that it has.
Therefore, many companies consider broadening their reach to a similar field of products and services which allows them to utilize the existing resources and capabilities. However, diversification is not always profitable in this case as some markets have a high level of competition in all branches.
The second option for a company to diversify comes from its desire to appeal to a new market in order to sustain its profitability. If a company has enough reserves and a stable rate of growth in a particular niche, it can choose to create new products and search for new customers in order to enter a different market. This action may give this business a chance to continue increasing its success and profitability.
Global Strategy
While the implementation of a global strategy can bring benefits to a company, it may also have some disadvantages. On the one hand, creating a multinational company and pursuing a global business strategy may give one an opportunity to offer the products to the customers while not being restricted by national borders (Frynas & Mellahi, 2015). In a situation, where the local demand is not as high, pursuing a global strategy may result in a company’s growth and popularity. Worldwide brand recognition may significantly affect this company’s success. On the other hand, this approach may not be viable in some circumstances.
For instance, not all companies operate in a market that has international recognition. Some firms may not find enough customers that will be interested in their products in other parts of the world. Thus, these businesses will not profit from adopting a global strategy.
References
Alfaro, L., Conconi, P., Fadinger, H., & Newman, A. F. (2016). Do prices determine vertical integration? The Review of Economic Studies, 83(3), 855-888.
Editorial Board. (2015). Research methods for strategic management. Schaumburg, IL: Words of Wisdom, LLC.
Frynas, J. G., & Mellahi, K. (2015). Global strategic management (3rd ed.). New York, NY: Oxford University Press.
Neffke, F., & Henning, M. (2013). Skill relatedness and firm diversification. Strategic Management Journal, 34(3), 297-316.
Porter, S. (2015). Domino’s buys biggest German pizza chain in $86m deal. BBC News. Web.
Williams, R. (2015). Apple buys Star Wars motion-capture company Faceshift. The Telegraph. Web.