Business Strategies, Efficiency and Effectiveness - Assignment Example

Institution : xxxxxxxxxxx Title : xxxxxxxxxxx Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx @2011 Table of Contents Table of Contents 2 Introduction 3 Efficiency and Effectiveness 4 Economies of Scale 6 Market Power 7 Reduced Profits attained from the overall business activities 9 Building core competencies 11 Conclusion 13 From the above analysis what is evident is that both the vertical and horizontal integration strategies are actually beneficial. Some of the outlined advantages of horizontally integrated firms over the vertically integrated firms include; Efficiency and Effectiveness, Economies of Scale and market power. On the other hand the disadvantages of horizontal integration over the advantages of vertical include reduced Profits attained from the overall business activities and Building core competencies. Although there is a changing trend of adoption of both strategies what matters most is the ability of the firm to implement the selected business strategies efficiently. As a result in despite of the strategy adopted, the overall outcome should be benefits such as gaining competitive advantage, maximizing shareholders wealth and increasing the firm’s profits. 13 References 13 Introduction Business strategies are fundamental elements in the running of any particular business. This is because they provide the basic direction for strategic action. It is essential to take note of the fact that the success of any business in any particular sector is governed by its ability to implement the selected business strategies effectively. The technology sector, for instance, has transformed its corporate structures from vertical to horizontal groupings. What is evident according to current industrial analysis is that a turn back to vertical or even conglomerate business strategies is emerging, implying that any of the strategies could double as the basis for attaining the major long-term goals of any given firm. This particular paper seeks therefore to explain both the advantages and disadvantages in general of firms in a horizontally integrated (or focused) sector against those in a more diversified businesses that are vertically integrated or conglomerates. Horizontal integration can be described as a long-term business strategy employed by a given firm or a business seeking to increase its market share. It occurs when a given firm is merged with, or taken over by a different firm in the same industry and operating at the same stage of production as the merged one. In this case both the firms are in the same stage of production as well as in the same industry. The objective of horizontally integrated firms is normally to merge similar companies and control (monopolize) a particular industry (Megginson & Smart, 2008). The merger of UK’s two major television firms, Granada and Carlton, to form ITV forms an example of horizontally integrated firms. On the hand, vertical integration can be described as a long-term business strategy in which various steps in the production and distribution of a firm’s products or services are controlled by a single entity, so as to increase the entity’s power within a given market. Usually each component of the supply chain produces a different product or a market-specific service, and the products and services combine to meet a common need. A good case in point is what happens within the oil industry whereby a lot of the leading firms take up the role of producers, refiners and explorers of the crude oil. In addition they usually own individual retail networks that are used for the sale of diesel and petrol. Vertical integration can be undertaken through forward integration whereby the firm merges with another firm in order to forward the chain of supply. Backward integration is the second type where the business merges with another firm that exists at the previous level of supply (Megginson& Smart, 2008). Efficiency and Effectiveness One of the advantages of firms in a horizontally integrated (or focused) sector against those in more diversified businesses that are vertically integrated is in terms of their increased efficiency and effectiveness. As highlighted by Kazim (2008), the nature of strategy by firms in a horizontally integrated sector provides them with a unique advantage where small-sized organizations find it a challenge to prevail over in realizing the goals of efficiency and effectiveness. According to Kazmi (2008), firms in a horizontally integrated sector thrive both in terms of their operation functions and marketing, as a result, improving on their efficiency and effectiveness. For instance, when a horizontally integrated firm wants to sell its products in various geographical market segments, it is able to have several subsidiaries selling the same products and services widely; as a result, making the firm horizontally integrated as far as marketing is concerned. For instance, the travel and tourism industry in the UK, offers a suitable context of a horizontal strategy of integration. There has been a rise in acquisition in order to consolidate, attain bigger size as well as increase the efficiency and effectiveness of firms carrying out the acquisition. The year 2004 acquisition of 11travel firms by First Choice (UK’s leading leisure travel firm) at a cost of 28.3 million Euros is an example of horizontal integration. The takeover included the StudentCity.com, the Adventure Company, the Adventure Centre, Trips Worldwide and the Let’s Trek Australia, among others. A key factor in this acquisition exercise is the synergy predicted in terms of the firms carrying out the acquisition expanding their reach, as result enhancing their efficiency and effectiveness, and even their regional presence (Kazmi, 2008). On the other hand, firms in vertically integrated or conglomerates sectors suffer from inefficiency that is introduced in two ways. One, vertically integrated companies find it difficult to take the advantage of the economies of scale, based on the fact that the relatively small needs of an identical or a same department within a firm in a vertically integrated sector is less suited for this. In addition, since vertically integrated firms have to rely totally on their own departments to realize the needs of their supply chains, they cannot be flawlessly efficient, they have to either possess excess capacity (which will often be wasted) or insufficient capacity which will be fully used, but introduce holdups to the chain( Hill & Jone, 2009). Economies of Scale Another advantage of a horizontally integrated firm over those in more diversified businesses that are vertically integrated or conglomerates is in terms of the benefits of the economies of scale. By adopting the horizontal strategy in their businesses, firm managers choose to invest their firm’s capital resources to acquire the assets of their industry competitors in order to increase the profitability of their single-business model. According to Meggison and Smart (2008), horizontally integrated firms possess the potential to gain from the economies of scale from combining their resources. An example of horizontally integrated firms is the merger of two major television firms in the UK, Carlton and Granada. According to Greenaway et al (2003), one of the most common reason for this merger resulted from the firms’ joint ability to take advantage of the economies of scale. As a result of the merger, Carlton and Granada hoped to save an estimated £55 million annually by merging their operations. Greenaway et al (2003), further highlights that profitability of the horizontally integrated firm increases when the strategy of horizontal integration reduces the cost structure, increases the bargaining power over suppliers and buyers, enhances product differentiation, reduces competition within the industry, as well as replicating the business model. As a result of these, the horizontally integrated firm is able to gain from the benefits of economies of scale. Market Power Horizontally integrated firms have also an advantage over those in more diversified businesses that are vertically integrated or conglomerates in terms of their increased market power. According to Finlay, (2000) horizontally integrated firms normally consolidate a particular industry, thus creating a monopoly. By decreasing the numbers of competitors in the market, firm that are horizontally integrated are able to gain market power. In addition, the firms are able to gain market dominance by dominating supplies and downstream channel members in terms of cost and quality. Moreover, contrary to vertically integrated firms that control each and every step of their supply chains for a limited product line, producing as well as marketing a particular product in a variety of ways enables horizontally integrated firms to increase their market coverage, in this case, controlling a larger segment of a given industry. This growth strategy also enables firms to introduce products and services that have already been efficiently managed in its home base into other markets (Finlay, 2000) .For instance The year 2004 acquisition of 11travel firms by First Choice (UK’s leading leisure travel firm), enabled it to introduce its products and services that had already been efficiently managed in its home base into other new markets. Besides, horizontally integrated firms such as First Choice may benefit from the fact that problems involved in getting to know as well as penetrate a new market can be solved by linking with the local partners (Kazmi, 2008). Vertically integrated firms on the other hand greatly face the challenge diminished market power. Market share is usually assessed by the ability of a firm to function independently of its competitors. What is evident is that based on the fact that vertically integrated firm usually operate as a single entity within the market, it is less likely to prevent the threat of new market entry or competition from other firms by themselves not unless they enforce entry barriers. Meyer,( 2003) highlights further highlights that vertically integrated firms also face the challenge of diminished market based on the fact that by acting as monopolists in a particular market they are usually lured into increasing their prices which further leads to loss of market share in case a competitor enters the market with slightly lower prices . Meyer, (2003) also reveals that in cases where the market is static, such firms find it much more difficult to penetrate the market. Most often, penetrating such markets can only be attained through aggressive marketing and pricing which in turn can largely reduce their short-term profits. A historical case in point is that of the Birds Eye Company which held a long lasting market share within the Frozen food industry in UK in 1997. Originally, the vertical integration strategy seemed to work well with the firm, although there was lack of infrastructure within the supply chain the company was able to enhance its market share by having control over the aspect of quality. The reduction of the company’s market share was linked to the adoption of the vertical integration framework. Although the strategy seemed beneficial to the firm, as the company continued to develop, the strategy begun to bring about setbacks. One of the setbacks of vertical integration is linked to the aspect of cost. Birds Eye’s transactions costs were affected by the forces of competition. For instance advancements within the retail market changed the position of the buyers, as most of the existing retailers transformed their services from tiny service locations to huge self service retail supermarkets, the purchasing powers of the buyers begun to increase. As a result the prices of the goods begun to fall as a result market power shifted from Birds Eye Company to the retails who now owned large Frozen food supermarkets (Greenaway, et , al 2003). Reduced Profits attained from the overall business activities Horizontal integration has a number of setbacks in which the vertical integration strategy presents advantage. One of the setbacks of the Horizontal integration is based on the aspect of reduced profits that attained from the overall business activities. Although the objective of horizontal integration is to gain market monopoly and control in a particular sector , what is evident is that it leads to a reduction of the profits gained by one or both company’s that merge. When two different firms within the same industry and within the same level of production team up chances reduced profits may emerge. This is attributed to increased operational costs of both firms and the division of profits among the firms. For instance the merger of two giants company’s within the hotel industry , Travelbag and ebookers company in 2003 lead to a loss of profits and also about 200 hundred jobs ( The Guardian , 2003). Vertical integration on the other hand brings about the benefit of increased profits to the firm. Firms that have adopted this particular strategy are able to expand their internal business operations as a result they can raise their market and generate more sales which increases their profits. Meyer, (2003) highlights that; the supply management within vertically integrated firms introduces products to the market from the beginning to the end. This basically implies that vertically integrated business buy different businesses within the supply chain which makes them control the whole business process. The outcome is that the firm gets all the profits from each lever of the supply chain. Many firms within the U.K tourism sector have over the years gained a lot of profits due to the adoption of the vertical integration strategy. For instance the Tourism travel business has been able to integrate small businesses that provide other travel services and products. Although in the past years most of the touring company’s adopted the horizontal integration approach. In the recent years Tour operates have taken over traveling agency a type of vertical integration approach in order to gain a more profitable method of selling its travel services and products. The tour operates are then able to effectively control costs and operations which implies that the firm business is able to gain more income form its overall business activities (Meyer, 2003). Anther feasible example is from the food retailing sector whereby Tesco has utilized vertical integration to increase its profits. The company has been able to undertake both forward and backward integration which has increased its revenues. The company has integrated firms within its supply chain such as ones stop shops, superstores and garden centers. All theses undertakings have facilitated the company’s ability to capture upstream and downstream profits and thus increasing profit levels (Tesco Annual Review, 2007). Building core competencies Another setback that faces horizontally integrated firm is that of building core competencies. Core competencies are a combination of a firm’s technical capacity and pool of knowledge. Hill and Jones (2007) argue that developing of core competencies can best be attained by a firm’s ability to coordinate and integrate various groups within the organization. Hill and Jones(2007) further highlights although firms may recruit bright technologies to assist in enhancing their core competencies , doing so may not be very effective. Effective coordination among all groups that exist in an organization is basically the most essential factor in enhancing core. According to Hill and Jones (2007) horizontally integrated firms face the change of building their core competency based on the fact that creation of corporate synergy within the firm becomes difficult. Hill and Jones (2007) assert that although most firms that venture into horizontal integration usually have the objective of developing synergy sometimes the company fails in terms of attaining this anticipated gain, as a result focusing on building core competencies becomes rather difficult. Another challenge that causes the difficulty in the ability to building core competencies is the aspect of anti trust issues that usually arise due to the reduced competitors in the market. As a result, focusing on building core competencies between the two firms therefore becomes difficulty in scenarios where there are anti –trust issues. Vertically integrated firms on the other hand have chances of enhancing their core competencies. When a firm performs its operations across the value chain of the industry, it is able to take control of all the critical tasks within the business. Hill and Jones (2007) reveal that such kinds of firms are able to focus their resources only on the activities that are essential or their core competencies. The building of core competencies within vertically integrated firms therefore arises from the coordination of different production skills and technology at different levels of the supply chain. Furthermore as opposed to horizontal integration whereby anti –trust issues arise , in vertical integration the management of the business is unified in the decisions made as a result focusing of developing core competencies becomes much more easier (Hill and Jones ,2007) . Conclusion From the above analysis what is evident is that both the vertical and horizontal integration strategies are actually beneficial. Some of the outlined advantages of horizontally integrated firms over the vertically integrated firms include; Efficiency and Effectiveness, Economies of Scale and market power. On the other hand the disadvantages of horizontal integration over the advantages of vertical include reduced Profits attained from the overall business activities and Building core competencies. Although there is a changing trend of adoption of both strategies what matters most is the ability of the firm to implement the selected business strategies efficiently. As a result in despite of the strategy adopted, the overall outcome should be benefits such as gaining competitive advantage, maximizing shareholders wealth and increasing the firm’s profits. References Finlay, P, 2000, Strategic management: an introduction to business and corporate strategy, Pearson Education. Greenaway, D, Hine, R, Milner, C, 2003, ‘’Country-specific factors and the pattern of horizontal and vertical intra-industry trade in the UK’’, Review of World Economics, 130(1) Hill, C and Jones, G, 2007, Strategic Management: An Integrated Approach, Cengage Learning. Kazmi, 2008, Strategic Management and Business Policy, Tata McGraw-Hill Education Meyer, K, 2003, ‘’Organizational Transformation in Transition Economies: Resource‐based and Organizational Learning Perspectives’’ Journal of Management, 15(4), p98-99. Megginson, W and Smart, S, 2008, Introduction to Corporate Finance. Cengage Learning EMEA. Tesco Annual Review, 2007, The Guardian, 2003, Travelbag and ebookers Company in 2003 lead to a loss of profits and also about 200 hundred jobs . Read More