Question

• Identify and evaluate benefits and risks of vertical integration.

• Describe and examine alternatives to vertical integration.

• Describe and evaluate different types of corporate diversification.

• Apply the core competence–market matrix to derive different diversification strategies.

• Explain when a diversification strategy does create a competitive advantage and when it does not.

Answer 1

Ans- Vertical Integration is the structure where the company owns the supply chain for their product. In this, one or more companies are involved in the different production stages.

Benefits of Vertical Integration

• Independence from Suppliers- One of the Benefit of Vertical Integration is no longer dependent on the suppliers and the unpredictability that come with them. It helps the Company to elevate the efficiency of the organization by streamlining the process of obtaining the product supplies, manufacturing and the selling.
• Cost Control- In Vertical Integration, the ability of the manufacturers to control the prices is like a big asset for the conglomeration who would also have to set the prices to match up with their supply chain. But when the companies integrate vertically, they are more able to control the costs closely.
• Creates the Economies of Scale- This is the Biggest Benefit of the Vertical Integration to create the Economies of Scale. Economies of Scale is the reduction in the production cost brought about especially by increasing the production facilities.
• Increase the Marketability and Product Knowledge- Vertical Integration also helps to understand the market for the products and create their separate version. That's why, a large Vertical Integration Company can easily meet the market demands by eying the products that sells well.
• Increase the Market Control- Another Major Benefit of Vertical Integration is increasing the market control the company assumes. It is fairly obvious that the company who has the higher supplier chain will have more control in the market.

Risks of Vertical Integration

• Due to the Vertical Integration, established distribution channels can be badly affected.
• It can give you the outcome which is unprofitable.
• Obsolescence because of the new technologies.
• Lack of the continued focus on the Business.
• Unsatisfactory return on Capital.
• High Cost due to Low Volume.

Alternatives to Vertical Integration

If for an Independent Buyer or Supplier, the reduction of a risk is the motivation of vertical integration. Then, the firm have alternatives to integrate into another value chain stage by the use of carefully constructed agreement with buyer or supplier.

If it is done rightly, then these agreements can result in the gains for the business might expect from the formal integration of the other stage of value adding activity.

If the Concern is about the continued exchanges relaibility then the supplier firm can contract the exclusive buyer from the seller firm. If the concern is about the prices of future, then the downstream firm will change little and also hurt the profitability.

Different Types of Corporate Diversification

• A Single Business which gets 95% of their revenue from one business.
• A Dominant Business Firm which get around 70 to 95% of its revenues from one business but also persues another business activity.
• A Firm that applies the related Diversification strategy when they get less than 70% of its revenues from the single business, but also get the revenues from the other businesses lines that are linked to the Primary Business Activity. Choices that are in the diversification strategy can be related constrained or linked.
• A Firm that applies the unrelated Diversification Strategy when 70% of its revenue come from its single business and there are few other revenues if there is any linkage among the business.

Different Diversification Strategies to implement thr Core Competencies

• When using the existing or any new dimesions to the core competencies and the market, then the four Quadrants are emerged.
• The Lower Left Quadrant do the combination of the existing core competencies with the existing market. In this, the Managers have to come up with the ideas of leveraging the core competencies to improve their market position.
• The Lower Right Quadrant do the combination of the existing core competencies with the opportunities of the New Market. Here, Managers think about how to redeploy and recombine the existing core competencies to compete in the future markets.
• The Upper Left Quadrant do the combination of the New Core Competency with the existing opportunities of the market. Here, Managers come with their Strategic Initiatives in their work of how to build the core competencies to expand and protect the current market position of the firm.
• The Upper Right Quadrant do the combination of the New Core Competencies with the New Opportunities of the market. This is the most challenging diversification strategy because it requires building the core competencies to compete in the future markets.

So, this about the Benefits and Risks of Vertical Integration, Alternatives of Vertical Integration, different types of Corporate Diversification and apply those core competencies to drive different diversification strategies.