Horizontal growth strategy
The target of each organization is to ensure that they advance their operations through strategic growth and development. Approaches used to achieve such progress require a precise analysis of the resources and the objectives of the business. The inclusion of the internal and external environment factors also plays a crucial role in planning and executing growth strategies. Experts have designed different methodologies that can be used to attain the anticipated growth. Various organizations have use techniques such as vertical, horizontal, concentric (related), and conglomerate (diversified) corporate-level growth strategies to enhance their performance and sustain the operations. Each of the approaches is only appropriate in line with specific organizational context. This section reviews the strategies giving examples of firms that have successfully incorporated each method in their managerial structure.
Most business enterprises have embarked on horizontal integration as a strategic management approach to enhance growth. Horizontal growth strategy involves the merger or acquisition of a major competitor or a series of firms operating within the same level of the added value chain. The objective of such moves is to improve the magnitude of economies of scale, which is essential when seeking to venture into new markets (Meyer & Estrin, 2014). The approach is also another technique of reducing competition externalities emanating from current suppliers and customers. The pooling of skills and resource capabilities creates a positive synergy that increases the market share. In most cases, the approach has been linked to firms that are skeptical about operating different businesses that are not related in line with the value chain elements in the industry. The need for more efficiency, which is guaranteed with related mergers rather than unrelated acquisitions, has encouraged firms to prefer horizontal corporate-level strategy.
Moreover, the method is associated with advantages and disadvantages; therefore, it is important to determine the appropriate scope that favors horizontal integration. The approach is related to limited risk because the interrelation that already exists between the firms seeking to merge or to be acquired. However, the technique does not offer any resource pooling diversity because the capital of the organization will remain in the same industry of operation (Kolczyk & Conradi, 2016). In such a case, sudden changes in the sector can have disastrous implication on the continuity of the business. Nevertheless, the horizontal strategy is appropriate for firms that are committed to specialization and extensive market control. For example, the Southwest Airlines in the United States has used the strategy over an extended period to sustain its competitiveness in the airline sector in the country. Through the strategy, the firm has survived critical industry-based shifts, which brought internal and external growth.
Vertical growth as an efficient method in business
Another efficient method that business firms have included in their growth plans is the vertical corporate-level strategy. In vertical strategy, the company may increase its operation in forwarding or backward integration. The backward vertical strategy involves the incorporation of the supply-based services into the activities of the firm through merger or acquisition of a supplier or setting up a new subsidiary company. Such a move enables the company to have and manage its source of supply (Li, Lu, & Tao, 2016). On the other hand, a company can resort to extending its operation to operate as a customer for its product or service. For example, a company producing goods can choose to operate chains of retail or wholesale units, which will serve as the customer for its finished products. Firms can also opt to acquire or merge with other businesses that perform such services, which assist in pooling up the chain processes associated with the product or service.
It is essential to note the reasons and appropriateness of vertical strategy in corporate-level management. The need to have control over the supply chain as well as the market and customers are some of the considerations that make firms to adopt the approach for growth. Dealing with industrial goods and service can also encourage firms to prefer direct involvement with the chain of operation from production to sales (Zhang, 2013). Backward integration is associated with a high level of supply and quality dependability while forward integration is linked to cost efficiency, market coordination, and satisfactory customer service. Therefore, the vertical strategy is important for firms operating in sectors where solid production is highly profitable. The Coca-Cola company has been successful through the use of vertical corporate strategy. The stiff competition that the firm faces led to the introduction of distribution and bottling units across the major states where the company is operating. The method has enhanced the competitive advantage of the enterprise.
A concentric diversification strategy in the corporate sector
A concentric diversification strategy is an approach that has been extensively used in the corporate sector to improve performance and encourage growth. The managerial approach here involves the introduction of new but related products within the production process with the objective of increasing the scope of service (Ondari, 2016; Zhang, 2014). The method of producing the initial and the new product are linked and can be easily integrated into the structure of the firm using common thread approach. The corporation lines could be similar based on technology used, customer usage, the channel of distribution, or competencies required to manage the product. However, the element of differentiation is evident, which makes the strategy different from the concentration approach. Therefore, using the technique to improve the capacity of the organization requires the analysis of the industry of operation to determine a related but distinct gap that is cost effective.
Furthermore, the concentric strategy is essential for firms with related activity-cost chains of transactions and processes, which present significant advantages are emanating from the possibility of sharing the production procedures at different stages. Therefore, companies seeking to achieve high profitability and competitiveness through the consolidation of more than one production lines can benefit from the concentric corporate-level strategy. The synergistic influence associated with the methodology has attracted manufacturing firms because of cost efficiency (Zhang, 2014). In most cases, technical production and machinery that have been combined with specific line products guarantee combined returns emanating from the sharing of the organizational resources. For example, Tesla Motors initially specialized on electric-based motor spares and electric train components; however, the company introduced the manufacturing of electric vehicles, which is currently the top income generator for the enterprise. Through cost sharing and combined production, the company managed to intensify its operations within a short period.
A conglomerate diversification as a growth method in business
Finally, some business entities consider conglomerate diversification as a method to enhance growth. In such as case, the company introduces a different product that does not relate to the present good or service. Therefore, the firm invests into a new field of production to improve its income, which calls for the establishment of new strategic approach and managerial structure; however, the ownership of the two units remains as a single entity (Barnat, 2017). The move is propelled by the perception that diversification of the resources of an organization to different sectors of the economy guarantees business continuity. Uncertainty in corporate sector can be disastrous for firms with a centralized pooled resources; however, operating in the different segmented market by introducing a different product can enable the firm to build a strong financial baseline.
Moreover, the conglomerate diversification strategy is applicable for firms seeking to enhance their capacity by taking advantage of other gaps in the business scope. For example, companies with the stable financial background can consider another organization seeking acquisition, but the assets and other resources being sold are undervalued. Such firms could be underperforming because of managerial challenges, financial constraints, or poor service or product. Therefore, if another organization with financial power takes over such ventures and transform their internal environment, then it can be another source of income. Unrelated diversification has been associated with risk diversification, net profit prospects, and solid organizational profitability (Barnat, 2017). On the other hand, it is critical because managing the independent production of commodity or service may present complexities relating to cost management. The firm may also lack the benefits enjoyed when enterprises specialize. Virgin Group Ltd., which was initially specializing in record labeling, expanded its operation to transport sector and later in healthcare. The firm has increased its revenue margin through conglomerated diversification.
In conclusion, corporate level strategies are critical for organizational growth and development. The method that a company can use depends on the objectives of the organization. Moreover, the capacity of the organization is another consideration that determines the approach that will be effective for expansion of services. However, irrespective of the method used, the success of expansion program is also subjected to external dimensions such as the level of competition associated with the sector and economic performance of the markets of operation. Nevertheless, expanding the functioning of the organization through vertical, horizontal, conglomeration, or concentric diversification could present new avenues for increasing the competitive advantage of the firm, performance improvement, and revenue expansion.
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Li, H., Lu, Y., & Tao, Z. (2016). Vertical Integration and Firm Productivity.T Journal Of Economics & Management Strategy,T 25(14), 122 - 134. http://dx.doi.org/10.1111/jems.12191
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