Four Corporate Level Growth Strategies

Vertical level growth strategy

Vertical strategy of growth refers to a firm expands into other business operations with an aim of reducing reliance on others during production and distribution. This strategy needs the firm to take on new aspects in order to operate the business. A firm can integrate by finding a way of creating its own sources of supply by either acquiring another company or establishing a subsidiary company and this act is known as backward integration (Harrigan, 2003). A firm may also integrate by moving into an area so as to serve as a customer for its products. This process of setting its own selling units is known as forward integration.

 

Literature review

Hyland (2013) asserted that vertical growth strategy is one of the most popular forms of growth strategies since it enables the company to attain control over suppliers and distributors giving the company more power within the market hence minimizing the costs of transactions and securing distribution and supplies channels.

According to Stuckey & White (1993), the principle importance of vertical strategy of growth is that firms are allowed to reduce total costs as they internalize the value that would be profits to other firms. For example a grocery store can spend $ 8,000 to do an activity that costing $ 4,800 to a trucking firm. Therefore, when it buys a truck and hires a driver, the grocery store will only spend $ 4,800. However, it is risky, expensive, complex because it hard to reverse it hence it requires a firm to partake of it after adequate analysis (Perry, 1975). There are instances when vertical growth strategy becomes useful and at times, it is not necessary for a firm (Stuckey & White, 1993). This therefore calls for managers to have a deeper knowledge on when it is important to vertically integrate and when not to.

 

Stuckey & White (1993) assert that there are four reasons for vertical growth strategy to take place. For instance when the market is too risky and not reliable, vertical growth strategy is necessary. It is also necessary when companies at other stages of industry have a powerful market than those at similar level with your company. Also, vertical growth may also be recommended to occur when it is expected to create market power through raising barriers to entry. Vertical growth strategy may also fail when its transactions are so risky contracts to improve on these risks are so costly (National Research Council (U.S.), 2009). A failed vertical market is characterized by few sellers and buyers, higher asset intensity and frequent transaction.

 

Horizontal level growth strategy

Horizontal growth strategy refers to an act where a firm expands by combining together with other firms in the same level of production. It involves addition of similar new products to existing ones, expansion of business activities into a bigger geographical region with an aim to broaden the existing organization (Hill & Jones, 2008). It also helps to develop the customer base by embarking on more businesses. It also means network building by embarking on more events carried out by various firms. Horizontal growth strategy is important because it reduces the wasteful competition existing among firms of the same level. It is a source of economies of large scale operation. It also provides control over market which increases the company’s competitiveness. However, horizontal growth strategy is associated with the following disadvantages; there is always a risk of overcapitalization (Goldsby & Martichenko, 2005). Consumers may also be exploited as a result of a firm becoming a monopoly.

Literature review

Gerald & Elisifa (2013) affirm horizontal growth as a strategy used by organizations to sell particular products in various markets. This strategy is proved to be so popular in marketing compared to vertical growth strategy. This particular strategy is more popular where firms are acquired or merged in the same industry and at the same stage of production for example a motor vehicle company amalgamates with another motor vehicle company.  Hyland (2013) stated that horizontal growth strategy helps to strengthen the position of the firm in the industry. Additionally, it allows the firm to become more competitive.

Conversely, Knapp (1988) argues that horizontal growth entails expansion of a particular firm well established in the industry which helps the firm to grow its share in the market for a certain product. However, horizontal growth strategy is important for a standard competitive organization intending to improve its position in the existing competition in the industry (Werden & United States, 1996). This can be achieved through external and internal means.

Concentric growth strategy

Concentric growth strategy is a business strategy where a firm expands through adding new but related products with a purpose of increasing the value of the firm. This strategy is always useful to small business owners as they look on how to growth their businesses (McKechnie, 1998). Usually, this strategy does not involve merging or acquisitions but increasing the current business operations. Under this strategy, the firm does not only serve the existing customers more fully, but it also increases its market share by availing new products to new customers. Concentric growth strategy is important because it allows the firm to build its proficiency in a related area. This strategy may be effective in the event that adding new and related products will increase current products’ sales.

Literature review

Bernard & George (2014) suggest that concentric growth strategy involves firm diversification into other businesses related to the current business. The strategy enables the reduction of associated production costs in the business. For example a firm dealing in water projects device plants generating power during the process. In that case, the firm is trying to build a business around other businesses with value chains possessing strategic fits for competition. Similarly, this strategy of growth can be described as a way of adding new and related products by a particular firm. It involves expansion of a given firm into related products but in a distinct area.

Concentric growth strategy involves building a firm around businesses with its value chain possessing competitive valuable strategic fits (Arthur, 2004).  Strategic fit occurs where activities consisting of different value chain are similar enough to offer opportunities for the firm to diversify. Pearce and Robinson (2010), state that concentric growth strategy is a grand strategy involving second business operations that benefits from accessing the core competencies of the firm also referred to as related diversification. Maurer (1990) states that strategic fit occurs where value chain in differing businesses offer opportunities for transferring cross business resources by uniting the performance of activities in the related value chain.

Conglomerate growth strategy

Conglomerate growth strategy is a business strategy where a firm expands by adding new products that are considerably different from the firm’s existing products. It occurs when a firm expands to another area totally different from its current business (Amit & Livnat, 1988). This strategy is normally based on the rationale that expanding into a different industry has a very attractive potential. The most common reason to pursue this strategy of growth is the limited opportunities in the firm’s current line business which therefore requires a firm to find other opportunities in other types of business (Herger & McCorriston, 2016). Furthermore, a firm may also pursue this strategy as a way of increasing its growth rate. This strategy becomes effective i case the new operation has greater opportunities of growth than those in the previous business. Possibly the biggest disadvantage faced with this strategy of growth is the increased administrative problems.

Literature review

Grigorieva and Gorbatov (2015) state that conglomerate strategy of growth involves merging of several firms or organizations from differing industries into one corporate structure forming a single headed company with subsidiaries. Through this strategy, firms get opportunities to enjoy effective resource allocation through financial synergy and internal market capital. Firms have the capacity to boost their effectiveness in the emerging markets (Knecht, 2014).

Voskanyan (2015) defined onglomerate as a corporation made up of various smaller, independent companies that are able to operate across several sectors or industries. In spite of the possible benefits associated with this strategy, the firm may face a challenge of becoming so big which makes it difficult to be efficiently managed. This can result into lack of focus exacerbating managerial problems hence reducing shareholder returns. This is why some subsidiaries have been left as stand –alone entities.

References

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Harrigan, K. R., & Harrigan, K. R. (2003). Vertical integration, outsourcing, and corporate strategy. Washington, D.C: Beard Books.

National Research Council (U.S.)., & National Research Council (U.S.). (2009). Evaluation of NSF's program of grants for Vertical Integration of Research and Education in the Mathematical Sciences (VIGRE). Washington, D.C: National Academies Press.

 Stuckey, J & White, D. (1993). When and when not to vertically integrate. Copyright © 1993 by the Sloan Management Review Association. All rights reserved.

Perry, M. K. (1975). The theory of vertical integration by imperfectly competitive firms. Stanford: Center for Research in Economic Growth, Stanford University.

Absanto, Gerald and Nnko, Elisifa. (2013). Analysis of business growth strategies and their contribution.

Hill, C. W. L., & Jones, G. R. (2008). Strategic management: An integrated approach. Boston: Houghton Mifflin.

Goldsby, T. J., & Martichenko, R. (2005). Lean Six Sigma logistics: Strategic development to operational success. Boca Raton, Flor: J. Ross Pub.

Knapp, W. M. (1988). Event analysis of horizontal mergers and acquisitions in U.S. airlines and eight British industries.

Werden, G., & United States. (1996). The entry inducing effects of horizontal mergers. Washington, D.C.: Economic Analysis Group, Antitrust Division, U.S. Dept. of Justice.

Bernard Oyagi Marangu Wilfred, and George Gongera Enock. An analysis of concentric

Arthur A, Thompson J. (2004), Strategy: Wining in the Market Place, Core Concepts

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 Pearce, J. & Robinson, R. (2010) Strategic Management; Formulation Implementation

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McKechnie, N. H. P. (1998). A study in concentric diversification.

Maurer, B. A. (1990). The evolution of concentric diversification of sports franchises and media entities.

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Amit, R., and J. Livnat. (1988) "A Concept of Conglomerate Diversification." Academy of Management Journal 28 (1988): 593–604. : http://www.referenceforbusiness.com/management/De-Ele/Diversification-Strategy.html#ixzz4JBEZ5yA3

Voskanyan, R. O. (2015). Implementing A Strategy Of Innovation Company Value Growth Through Conglomerate Mergers. Economic Analysis, (1), 54-60.

Herger, N., & McCorriston, S. (2016). Horizontal, Vertical, and Conglomerate Cross-Border Acquisitions. IMF Economic Review, 64(2), 319-353. doi:10.1057/imfer.2015.42

Knecht, M. (2014). Diversification, industry dynamism, and economic performance: The impact of dynamic-related diversification on the multi-business firm. Wiesbaden: Springer Gabler.