It is the goal of any business to be profitable and sustainable in the short-run and in the long run. To achieve this, many firms come up with a number of methods and strategies that tend to utilize their resources and capabilities in an effective and efficient manner. As a result, such organizations tend to become market leaders and command a large market share in their respective industries.
Vertical and horizontal integration are amongst the most used methods in ensuring that companies have a competitive advantage over their rivals. These methods are therefore grand strategies that aim at giving companies the right direction in terms of their running, operations and management.
Through their application, companies have the chance to have a competitive advantage over their rivals and command a large market share.
Horizontal integration is the process through which firms in the same industry and similar level of production merge to jointly produce goods and services. This joint operation normally tends to reduce production and operating costs. As a result, such firms tend to produce their goods and services at a cheaper price as compared to other individual companies who undertake the whole process of production on their own.
To stand on a stronger base, firms that decide to adopt this strategy should be experts in their respective fields. Through horizontal integration, firms are able to exploit the economies of scale to their advantage. This is because they incur costs jointly. Examples of costs that firms are able to incur jointly include transpiration, warehousing, advertising, selling and distributions, purchase of raw materials and labour costs.
Such companies will thus produce their goods and services at a cheaper price as compared to their rivals. Due to this fact, they will stand a chance of sell their goods at a lower price as compared to other firms in the market. This will in turn increase their market share.
As a result, such companies will have a competitive advantage in their industries. In addition, through merging up, companies that have adopted this strategy will enjoy the privileges of monopoly. The entry of new firms into the market will be difficult due to the high market share that they hold.
In the motor industry, Volkswagen is a company that has benefited greatly from horizontal integration. The company merged with Skoda to manufacture vehicles. Their main target group were the members of the middle and lower classes of the society. Through their expertise, they were able to manufacture cheap and efficient cars that are desirable for individuals of these classes.
At the present moment, Volkswagen is in the process of merging up with Porsche to produce luxurious cars for the individuals of the upper class. Once this is in place, Volkswagen will have a large market share in the motor vehicle industry in Europe by having cars that meet the needs of all individuals in the society. As a result, the company will have a competitive advantage over other companies that target a specific class in the society.
Vertical stratification is also another grand strategy that can enable firms to have a competitive advantage and command a large market share. This method is achieved by the acquisition of suppliers or consumers in a market by a firm. This strategy has the following options:
- Forward integrations.
- Backwards integration.
- Full integration.
- Taper integration.
In forward integration, a firm acquires a company whose level of production is in a later stage while in backward integration, a firm acquires a company whose level of production is in an earlier stage. In full integration, a firm controls all the activities of manufacturing a product.
In taper integration, on the other hand, a firm manufactures goods and services by merging with suppliers of raw materials and distributors of the products. Using the concept of vertical integration brings about a number of benefits within an organization.
This concept tends to reduce costs, improve the efficiency of production and improve on the quality and quantity of the product. These facts are essential in ensuring that companies have a competitive advantage over their rivals.
Porters Grand Strategies
There are several factors that affect the manner in which firms operate within their respective industries and the profitability they enjoy. The attractiveness that a firm has in the industry in which it is operating is a primary factor in the determination of the profitability that the firm will enjoy.
The position that a business holds within the industry is an operating in acts as a secondary factor (Quick MBA, 2011). Therefore, a firm may be in a state of earning profits that are below average but due to its strategic positioning it still earns high returns.
According to Michael Porter, a firm positioning depends on the manner in which it is utilizing its strengths (Quick MBA, 2011). The strengths of a firm depend on whether a firm wants to cost conscious or differently from its rivals.
While a firm is operating on a broad or narrow scale, it can achieve this either through cost leadership, differentiation or focus (Quick MBA, 2011). The following graph shows Porters grand strategy model.
Using the cost leadership strategy, a firm will focus on reducing its cost of production. To achieve this, a firm may seek cheaper raw materials, use the most efficient methods of production or reduce its labour costs. As a result therefore, the average cost of production per unit will be reduced. Such a company may sell its goods and services at the average market price or below the market price.
Selling the goods at the market price will ensure that the company earns more profits as compared to its rivals. On the other hand, selling the goods below the market price will reduce the revenue of the company but will earn it market share. For this strategy to be successful, a company needs to have a lot of capital, expertise, skills and efficient channels for marketing and distribution of its products (Quick MBA, 2011).
IKEA is one of the companies that use this technique. Since its incorporation, the company has been coming up with means of reducing its production costs in order to reduce the prices of its commodities. The strategy has been successful since IKEA has grown to become one of the leading furniture manufacturing and retailing companies in the world. This strategy has its own risks.
Other firms may also decide to lower down the costs of their goods and services. Technological advancements also lead to the formulation of more efficient methods of production that reduce costs and increase the quantity of production. Other firms may also decide to target narrow markets. All these factors will reduce the competitive advantage that a firm had gained as a result of using this strategy.
To build on its strengths, a firm may also adopt the differentiation strategy. While using this strategy, a firm will try to have a competitive advantage by producing goods that are different or unique as compared to the ones that are currently in the market. These new version or types of goods should suit the needs and requirements of consumers in a better way as compared to the goods that are currently present in the market.
As a result, many customers will prefer the new version of the goods and services that are produced by the firm. This will in turn increase the demand for the good and consumers they may become loyal to the product and the brand. In addition, they may recommend it to other individuals.
This will in turn increase the market share of the firm in the industry. In addition, the company will have a competitive advantage over its rivals. To achieve this, a firm must be innovative and invest on research.
It must also have a skilled and innovative team and must use brilliant marketing techniques to reach its target group. Imitations from rivals coupled with changes in consumer tastes and preferences are the main risks to this strategy.
A firm that adopts the focus strategy is one that operates within a narrow range of the market. Due to this fact, such firms would like to achieve a mix of differentiation and cost advantage. To achieve this, a firm normally identifies a specific target group in the market and produces goods and services that meet their specific needs. Due to this fact, such firms are able to satisfy the needs of their customers and earn consumer loyalty.
It will therefore be difficult for new firms to enter into this market due to the brand loyalty that the target group has for the firm. Firms operating in such markets may also sell their goods at high prices since they do not have close substitutes.
However, there are some risks that are involved. These include changes in consumers tastes and preferences and imitations. Other firms may also focus on a section of this target market and supply them with a good that is of a better quality.
Reference
Quick MBA, n.d, Porter’s Generic Strategies. Web.