Integration or diversification means the combination
of different economic activities under unified control this may involve
vertical integration that is either backward integration where a business in
combined with one supplying its impacts or forward integration where a business
is combined with one is using it output. It may also involved horizontal
integration where a business is combined with another which may use the same
supplier or sell in the same markets
Vertical integration is the steps that a product
goes through in being transformed from raw materials to a finished product in
the possession of the customer constitute the various stages of production.
Vertical integration may involve forward for
example an oil company running filling stations, or backward integration for
example an army running its down own
ordnance factories. Backward integration also may be undertaken to provide a
more dependable source of needed raw materials forward integration also allows firms
more control over how its projects are sold and serviced. Furthermore a company
may be better able to differentiate its products from those of its competitions
by forward integration. By opening its own retail outlets, a firm is often
better able to control and train the personnel selling and servicing its
equipment.
Since servicing is an important part of many
products having an excellent service department may provide an integrated firm
a competitive advantage over firms that are strictly manufactures. Vertical integrations may be beneficial for firms
if its assists in co-ordination over the quality and reliability of
intermediate goods which one independent firm would have sold to the other. On
the other hand it may inhibit entry to and competition in an industry. Some firms
employ vertical integration strategies to eliminate the “project of the middle
man” firms are sometimes able to
efficiently execute he tasks being performed by the middle ma (wholesalers,
retailers) and receive additional profits. Is also a growth strategies which
involves a significant increases in performance objectives (usually sales or
market shares beyond past levels of performance. It may also improve the effectiveness
of the organization.
Large companies have a number of advantages over
smaller firms operating in more limited markets.
i)
large size or large market share can led to
economics of scale marketing or production synergies may result from more
efficient use of sales calls reduced travel time, reduced changeover time and
longer production runs.
ii)
Learning and experience curve effects may produce
lower costs as the firm gains experience in producing and distributing its
products or service. Experience and large size may also lead to improved
layout, gains in labour efficiency, redesign of product or production processes
or large and more qualified staff department.
iii)
Lower average unicosts may result from a firms
ability to spread administration expenses and other overhead cost over a larger
unit volume. The more capital intensive a business the more important its
ability too spread cost across a large volume becomes.
iv)
Improved linkages with other stages of production
can also result from large size. Better links with supplies may be attained
through large orders, which may produce lower cost (quantity discounts)
improved delivery or custom-made product that would be affordable for smaller
operations. Links with distribution channels may lower cost by better location
of warehouses more efficient advertising and shipping efficiencies.
v)
Sharing of information between unit of large firms
allows know ledge gained in one business nits to be applied to problems being
experienced in another unit. Especially for companies relying heavily on
technology, the reduction of R and D cost and the time needed to develop new
technology may give large firms advantages over smaller, more specialized firms.
vi)
Taking advantages of geographic differences is
possible for large firms. Especially for multinational firms differences in
wage rate, taxes, energy cost, shipping and frights changes and trade restrictions
influence the costs of business. A large firm can sometimes lower its cost of
business by placing multiple plants in location providing the lowest cost.
Smaller firms with only one location must operate within the strengths and
weaknesses of its single location.
Synergy may be achieved by combining firms with complementary
marketing, financial operating, or management efforts. Breweries have been able
to achieve marketing synergy through national advertising and distribution. By
combining a number of regional breweries into a national network, beer produces
have been able quantity discount through combined ordering would another
pssobile ways to achieve operating synergy. Yet another way to efficiency is to
diversify into an area that can use by products from existing operations. The
fermentation process into feed for livestock.
Firms may also pursue a conglomerate interaction
strategy as a means of increasing the firms growth rate. As discussed earlier,
growth in sales may make the company more attractive to investors. Growth may
also increase the power and prestige of the firms executives.
Conglomerate
growth may be effective if the new area has growth opportunities greater than
those avaible in the existing line of business probably the biggest
disadvantage of a conglomerate diversification strategy in the increase in
administrative problems associated with operating unrelated business. Managers
from different divisions may have different backgrounds and may be unable to
work together effectively. Competition between strategic businesses until for
resources may entail shifting resources away from one division to another. Such
a move may create rivalry and administrative problem between the units. Infact
combined performance may deteriorate because of controls place on the
individuals units by the parents conglomerate. Decision making may become slower dues to longer review period and completed
relating systems.
Diversification efforts may be either internal or
external.
INTERNAL DIVERSIFICATION: this occur when a firms enters a different but
usually related, line of business by developing the new line of business
itself. Internal diversification frequently involves expanding a firms products
or market base.
One form of internal diversification is to market
existing products in new market. A firms may elect to broaden its geographic
base in include new customer, either within its home country or in
international markets. A business could also pursue an internal; diversification
strategy by finding new uses for its current product. For example. Arm and
Hammer marketed its baking soda as a refrigerator deodorizer finally, firm may
attempt to change markets by increasing or decreasing the price of products to
make them appeal to consumers of different income levels.
Another
form of internal diversification is to market new products in existing markets.
Generally this strategy involves using existing channels of distribution to
market new products. Retailers often change product lines to include new items
that appear to have good market potential. Example Johnson and Johnson added a
line of baby toys to its existing line
of items for infants. Packaged food firms have added salt free or low calorie
options to existing product line.
It is
also possible to have conglomerate growth though internal diversification. This
strategy would entail marketing new and unrelated products to new markets. This
strategy is the least used among the internal diversification strategies, as it
is the most risky. It requires the company to enter a new market where it is
not established. The firms is also developing and introducing a new product.
External
diversification: this occurs when a firm looks outside of its current
operations and buy access to new product or markets. Mergers are one common
form of external diversification. Mergers occur when two or more firms combine co-operations
to form one corporation. Perhaps with a new name. One goal of a merger is to
achieve management synergy by creating a stronger management team. This can be
achieved in a merge by combining the management teams from the merged firms.
External diversification also occur when the purchased corporation loses its
identity.
The
acquiring company absorbs it. The acquired company and its assets may by
absorbed into an existing business unit or remain intact as an independent
subsidiary within the parent company: acquisition usually occur when a larger
firm purchases a smaller company.
There
are many reasons for pursuing a diversification strategy, but most pertain to
management desire for the organization to grow. Companies must decide whether
they want to diversify by going into related or unrelated businesses. They must
then decide whether they want to expand by developing the new business or by
buying an ongoing business. Finally management must decide at what stage in the
production process they wish to diversify.