Business strategy

Is vertical growth better than horizontal growth?

Vertical growth involves an organization concentrating on the existing location and working hard by attaining thorough integration of various functions to grow the business in this particular area.  Concentrating on vertical growth is better than horizontal growth for businesses that have not built enough strength in its networks that could shield against any risks that comes with expansion (Wheelen, Hunger, Hoffman & Bamford, 2015). Before a business can decide to expand or branch out to new locations, there is a need to ensure that the existing market and opportunities have been pushed to the highest level of what can be done. There is no point of going to the expense of other locations when there are so many opportunities in the present location. Horizontal growth involves a lot of financial resources for massive investments, time and effort to experience the desired results but it is not worth taking the risk if such input has not been invested in exploiting the current position to the fullest.

Vertical growth ensures that a business focuses on the existing opportunities in distribution, retail and supply channels that can assist in serving current customers. Through this the firm is able to increase sales for its products and services, or even develop products that will appeal to the present customer base whose needs have not been satisfied. Concentrating on the current market position will ensure that the business will achieve financial muscle and efficiency in its operations which can later form a basis for horizontal growth. When the business has grown a strong foundation, it can then proceed to expanding to new locations and where it can enjoy economies of scale

 Is concentration better than diversification?

Concentration as an investment strategy can bring about optimal results especially in the international markets.  This strategy can take advantage of information resource obtained from specializing in a certain line of business when a firm is growing vertically and the economies of scale from a horizontal growth.  While diversification may be viewed as a risk reduction strategy that also helps in minimizing volatility, the strategy places businesses at the mercy of overall market performance. A major benefit of choosing a concentration strategy is that while risk may be more, there is increased potential for reward (Wheelen et. al 2015).  Investments that obtain high level of returns are not normally diversified widely but are normally concentrated in a small number of industries, or the market sectors whose performance is above the overall market.  A concentrated business makes it possible for investors to have their focus on various quality investments. The best strategy is where the investor will concentrate on a modest investment while having their focus a selection of high-quality investments chosen according to preferred investment goals.

 When a business aims at making better returns than the market average, the management may wish to reconsider the diversification strategy in the investment choices.  The downside of diversification is that if a business investment is performing poorly in terms of growth and profit realization among other investments that have a wonderful performance; it may substantially water down the overall growth and performance in returns (Wheelen et. al 2015).  Another challenge in using a diversification strategy is that more cost may be incurred in rebalancing the investment to maintain the diversification level.  A business that is widely diversified presents bigger challenge in adjustment and monitoring since investors has to remain on top of a wide range of different investments.

 Is concentric diversification better than conglomerate diversification?

Concentric diversification has various advantages that make it preferable to conglomerate diversification since a business can use its competitive edge to gain more market share or partner with other business to gain synergy.  A business employing the concentric diversification strategy can achieve synergy by combining efforts with other firms which have complementary financial, operating, management and marketing approaches in order to reach out to the market which it cannot on its own (Wheelen et. al 2015). In addition, a firm can build on the competiveness of the products and expertise in producing such products to reach out in the existing market or other markets.  The high quality product will enable a strategic fit, especially where the businesses are able to create synergy through existing distribution channels to present the product to the market (Wheelen et. al 2015). A firm that wishes to diversify by exploiting the synergy advantages and chain inter-relationships can capture a wider market share and hence an improvement in the profit making.

While concentric diversification experiences little problems in decision making, conglomerate diversification involves various administrative problems that relate to operating businesses that are unrelated. Differences may arise in decision making among managers various managers of these businesses which may prevent an effective strategy formulation and implementation.  There can also emerge competition between various business units for specific resources so that resources are shifted from one unit to another (Wheelen et. al 2015). This means that the advantages associated with concentric diversification are lacking and this can affect business operations, competitiveness and even performance in the market. Rivalry arising from the business units is unhealthy.

 

References

Wheelen, T. L., Hunger, J. D., Hoffman, A. N., & Bamford, C. E. (2015). Strategic Management and Business Policy: Globalization, Innovation and Sustainability: Global Edition. Pearson Higher Ed.