Corporate-level Strategies, Integration, Diversification, And Outsourcing: An Overview

How and who makes strategy at the corporate level? How companies with multi-business Model formulate their strategies and what they target in their strategies

1. How and who makes strategy at the corporate level? How companies with multi business Model formulate their strategies and what they target in their strategies
2. Why companies integrate horizontally? What are the advantages and disadvantages? If you are in a single industry, how you formulate your strategy as against being in multi industry environment
3. Why companies integrate vertically? When they do both vertical and horizontal integration and why?
4. What is strategic outsourcing and alternative to vertical integration? Why companies choose this route compared to vertically integrate. Is there any financial or other reason for it?
5. Why and when companies diversify?
6. How companies decide to diversify in related or unrelated industries and why?
7. When diversification go wrong? How companies misread their business, industry and their capabilities in diversification?
8. Why companies acquire other companies and why they enter other industry.

Corporate-level strategies address the whole scope of strategy for the enterprise. This strategy includes the decision by which service or product competes in a region. It is associated with multi-business plans, resource allocation; staffing and other resources are allocated. The corporate-level strategies have been decided by the inputs from business-level managers (Rothaermel 2015).

Corporate with multi-business models work a lot to formulate their strategies. Managers attend business-level strategies and brainstorming sessions to choose the right initiatives for the organization. Corporate level strategies are maligned with the interests and operations of a particular line of business. To formulate strategies various product lines of a single company are merged together and wok as a single body which is known as Strategic Business Unit. Three models are used to formulate strategies by most of the organizations. These are Porter’s generic model, Miles, Snow’s model, and Product Life Cycle model. They target demography, segments to target their clients (Neffke and Henning 2013).

The horizontal integration takes place when two and more companies produce similar goods and provide same advantages join. It creates a monopoly. The example of Horizontal integration can be Walt Disney studio. Walt Disney started out as an animation studio with a target audience of mainly kids and small families. However, they took horizontal integration into live action films, and high voltage thriller movies. They achieved large share in film industry gradually (Thompson 2013).

The advantages of horizontal integration are that they can diversify their business, sell their product and services to a large share of consumers. Thus, the cost of manufacturing also comes down. It can also reduce the competition in the market. On the other hand, worst disadvantage is the reduction in overall value to the company because the expected profit only a few times materialized (Wang et al. 2013).

Why companies integrate horizontally? What are the advantages and disadvantages? If you are in a single industry, how you formulate your strategy as against being in multi industry environment

In a multi business environment the leadership of a single firm should float through innovative strategies. For a profit-oriented organization, the goals would be different; their objectives will be centered on profit making. They need to think of increasing profitability, gain more market share, boost customer satisfaction and complete the task well under budget (Rothaermel 2015).  

Vertical strategy is the one in which a company operates at multiple level of the distribution channel. It starts with the manufacturer then wholesaler buys it after that it goes to retailers. At the end customers, buy the product. For a forward vertical integration manufacturer directly sells to the consumers (Lee 2013).

Both vertical and horizontal integrations are meant to increase and expand the growth of business. Vertical and horizontal integrations mainly used by established businesses, as they are monetarily stable to take risks. A perfect example would be Apple. Apple Inc. is a public multinational organization that designs and introduces electronic items. It has world’s third largest cell phone market and has close to 400 retail stores around the globe. They integrated such a way that they can capture the emerging markets. Their manufacturing hub is in China as the costs are less there. They have increased their product line as well as market expansion to capture the profit and volume sell (Hirschheim 2015).

Strategic Outsourcing has two boundaries. One is boundary before outsourcing and boundary after outsourcing. Boundary before outsourcing has four parts like research and development, production, marketing and sales and customer service. Boundary after outsourcing includes all four parts but production and customer service are outsourced. It can be an alternative for vertical integration as it reduces cost. The activity of performance is more and the firm can focus attention and materials on activities important for value creation (Thompson 2013).

Vertical integration is a popular strategy for business growth and development. However, the procedure is itself time taking, expensive and difficult to implement. Outsourcing is sometime preferable in this particular aspect. It is less expensive, less time consuming and easy to implement. It has concrete reasons for choosing over vertical integration. Small firms have their issues regarding capital deficiency and less number of employees. Therefore, they sometimes find it difficult to stay in the market by taking vertical integration approach. Strategic outsourcing is the best way for survival for small organizations (Lee 2013).

Diversification is a mechanism to minimize risk by allocating investments among various financial instruments. The goal of diversification is to maximize return by investing in different zones, which would react differently to similar event. It may not give the guarantee against loss. Nevertheless, diversification is the most valuable ingredient of reaching long-range financial targets. It minimizes the risks. Diversified risk is also known as unsystematic risk. It is company specific or industry specific. It is of enormous help to diversify among different asset classes. They can be bonds, stocks; these may not react the same way to adverse incidents. It would reduce portfolio sensitivity to market swings. As the equity, market and bond market move in opposite directions so if the portfolio were diversified to different areas it would give positive outcome at the end (Pearce 2014).

Why companies integrate vertically? When they do both vertical and horizontal integration and why?

The companies often diversify between related diversification and unrelated diversification. Before any investment efficient business diversification strategy need to be used. Diversification analysis needs to demonstrate and support to achieve a return on investment more than risks and costs. Any venture owner should consider efficient diversification strategies to make a competitive advantage. Related diversification strategy have the advantage of analyzing the market and know about the advantages and threats. On the other hand, when a company adds unique or unrelated product lines into the existing product lines it introduces unrelated diversification. For an example, a mobile company might decide to go into television business; it is not related to the ongoing business. Therefore, it would be an unrelated diversification. It would be of immense help if the leadership of the firm can understand the advantage and disadvantages of unrelated and related diversification (Alessandri and Seth 2014).

Diversification goes wrong when there is a gap between market requirement and owner is thinking. The gap on strategy often comes as a blunder in this context. Prediction should be avoided before diversification; theory in this case might not be applicable all the time. Therefore, proper analysis of market and the opportunities and need of the hour should be judged before taking any decision (Bowen 2015).

When a company diversifies beyond its core business and starts venturing in different sectors the risks become more prominent. Diversification does not guarantee any key to success. The risk is when the vendors adopt broad-spectrum offerings and commit more than required. For instance, IBM was an IT stack vendor and they were integrating most of the components of infrastructure. Nevertheless, they were falling after a particular point. On 1993 when Lou Gerstner became the CEO, he revised the diversification strategy and made sufficient changes to bring back IBM to its previous position (Kuppuswamy and Villalonga 2015).

Companies sometimes acquire other companies and they enter other industries. It is called merger between two companies. If any superior company thinks, they can earn more profit by buying a small company they merge with it. Larger business firms generally have better access to sources of financing in the money markets than small firms. If one of the firms involved in loss then the loss can be diminished against the profits of the firm that it has merged. By entering into a contract with a company of different line of business, it often benefits the company, which is running at a loss. They can gain operational advantage by shielding extra tax. However, some authors argue it actually causes exact opposite effect and create monopolization in one industry (Schilke 2014).     

References:

Alessandri, T.M. and Seth, A., 2014. The effects of managerial ownership on international and business diversification: Balancing incentives and risks.Strategic Management Journal, 35(13), pp.2064-2075.

Boguslauskas, V. and KvedaraviÄÂienÄ—, G., 2015. Strategic Outsourcing Plan and the Structure of Outsourcing Process. Engineering Economics, 58(3).

Bowen, H.P., Baker, H.K. and Powell, G.E., 2015. Globalization and diversification strategy: A managerial perspective. Scandinavian Journal of Management, 31(1), pp.25-39.

Buckley, P.J., 2014. International integration and coordination in the global factory. In The Multinational Enterprise and the Emergence of the Global Factory (pp. 3-19). Palgrave Macmillan UK.

Campbell, B.A., Coff, R. and Kryscynski, D., 2012. Rethinking sustained competitive advantage from human capital. Academy of Management Review, 37(3), pp.376-395.

Hirschheim, R., Heinzl, A. and Dibbern, J. eds., 2013. Information Systems Outsourcing: enduring themes, emergent patterns, and future directions. Springer Science & Business Media.

Kuppuswamy, V. and Villalonga, B., 2015. Does diversification create value in the presence of external financing constraints? Evidence from the 2007–2009 financial crisis. Management Science.

Lee, R.S., 2013. Vertical integration and exclusivity in the platform and two-sided markets. The American Economic Review, 103(7), pp.2960-3000.

Neffke, F. and Henning, M., 2013. Skill-relatedness and firm diversification.Strategic Management Journal, 34(3), pp.297-316.

Pearce, J.A., 2014. Why domestic outsourcing is leading America’s reemergence in global manufacturing. Business Horizons, 57(1), pp.27-36.

Rothaermel, F.T., 2015. Strategic management. McGraw-Hill.

Schilke, O., 2014. On the contingent value of dynamic capabilities for competitive advantage: The nonlinear moderating effect of environmental dynamism. Strategic Management Journal, 35(2), pp.179-203.

Thavikulwat, P., Chang, J., and Sanford, D., 2014. Shared experience as incentive for horizontal integration in business simulations. Developments in Business Simulation and Experiential Learning, 35.

Thompson, A., Peteraf, M., Gamble, J., Strickland III, A.J. and Jain, A.K., 2013. Crafting & Executing Strategy 19/e: The Quest for Competitive Advantage: Concepts and Cases. McGraw-Hill Education.

Wang, Y., Niu, B. and Guo, P., 2013. On the advantage of quantity leadership when outsourcing production to a competitive contract manufacturer. Production and Operations Management, 22(1), pp.104-119.