Is there any research suggesting how well the corporate strategies of vertical integration, diversification, mergers and acquisitions, and alliances work? When a company wants to add

Response Christian:

Is there any research suggesting how well the corporate strategies of vertical integration, diversification, mergers and acquisitions, and alliances work?

When a company wants to add something to itself, there are options that allow for expanding without inventing something entirely new as a strategy or creating excessive risk. Kaplan (1954) once argued that: "There is no reason to believe that those now at the top will stay there except as they keep abreast in the race of innovation and competition”. If a company understands their position in the market and the competition, they can effectively use certain business strategies that include vertical integration, diversification, mergers and acquisitions, and alliances as a way to keep ahead. Each strategy has their positives and negatives, so understanding what each one does for the company is the critical first step in deciding which route to follow. 

When a company sees a market opportunity they don’t currently compete in, but feel they can service an identified gap, the diversification strategy comes into play. Diversification at its core is penetrating a new market where you currently don’t participate. Tien and Ngoc (2019) define diversification as a purposeful plan of action to aims to move into new directions. The work builds upon Hitt et al. (2000) in which diversification can be broken down into two subcategories: related diversification and unrelated diversification. Related, or concentric diversification, is when a company moves into a new market but maintains the same main production of similar products.  Whereas unrelated diversification is where a company expands into totally new activities from what they currently produce or service. The intent of diversification overall is to spread risk across multiple lines of business to ensure that if one falters or matures, there is another that they can rely on.   

            Not every aspect of manufacturing, distribution, and sales usually resides within one company. There may be multiple companies that are part of the entire supply chain before a consumer of goods sees them. Vertical integration is a strategy where the company looks for ways to integrate or own multiple processes into their own exclusive chain. Zhang (2013) found in his research that that albeit a older concept, many large companies are focusing on this strategy in the last decade or two to gain an advantage. To illustrate an example of a company that has decided to use vertical integration, Tesla is a vehicle manufacturer .Over time, they realized that several parts of their supply chain were contingent on many other manufacturers or suppliers. As a result, they now make their own batteries, artificial intelligence to drive their car, robotics at their plants, and even control the salesrooms exclusively. Although this strategy can be profitable, the self-reliance can create risks since one company is responsible for so many functions and it can overextend the company since they have to constantly have innovation in all the areas they control.        

Competition is not always good for the market, especially if your company is losing out. Daniel Vasella (CEO Navartis, 2002) once stated:

“It is clear that you cannot stay in the top league if you only grow internally. You cannot catch up just by internal growth. If you want to stay in the top league, you must combine.”

One way to improve a company’s position is to look at a growth strategy that is mergers and acquisitions (M&A). The M&A is a strategy is a methodical process of evaluating companies that if purchased or merged with would create a much stronger position for one or both companies involved. Gupta (2012) describes an M&A as a restructuring of two companies as a strategic means to achieve a competitive advantage. A M&A is a methodical and planned approach that requires extensive research with the prospective company which comes with risk.  To be successful, a full understanding of each other’s market position, financial, and human capital must be assessed to determine the value to each company. This route can be expensive, and results are not guaranteed by simply buying another company. 

An alliance is literally as it sounds, creating a partnership to create a market advantage. The advantage can be something such as a company holds a license in a specific country or entry point for globalization. Elmuti and  Kathawala (2001) argue that alliances are risky though, oftentimes management on both sides do not understand the others method of operating or technologies that make a true seamless partnership. Russo and Cesarani, M. (2017) state that the risks overall can be mitigated using good governance, the coordination of leadership with realistic understandings of objectives, and making compromises with the partner companies.

To determine which growth strategy is the best, that all depends on the company and their market. Each strategy has risks associated with them, also they have costs.  The course of action will be contingent on the risk tolerance on many levels of a company, taking a high-risk strategy could prove very equitable for all involved. Stakeholders must decide if they can handle the potential for failure at any juncture of each one of the strategies before a company can decide to pursue that goal. 

References

Elmuti, D., & Kathawala, Y. (2001). An overview of strategic alliances. Management decision,

39(3), 205-218.

Gupta, P. K. (2012). Mergers and acquisitions (M&A): The strategic concepts for the nuptials of

corporate sector. Innovative Journal of Business and Management, 1(4), 60-68.

Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2000). Strategic management and strategic

competitiveness. South-Western College Publishing.

Kaplan, A. D. H. (1954). Big enterprise in a competitive system. (No Title).

Tien, N. H., & Ngoc, N. M. (2019). Related and Non-related Diversification Strategy of

Domestic Business Groups in Vietnam. International journal of advanced research in

engineering and management, 5(7), 12-17.

Russo, M., & Cesarani, M. (2017). Strategic alliance success factors: A literature review on

alliance lifecycle. International Journal of Business Administration, 8(3), 1-9.

Zhang, D. (2013). The revival of vertical integration: strategic choice and performance

influences. Journal of management and strategy, 4(1), 1.

Response Jonathan:

Is there any research suggesting how well the corporate strategies of vertical integration, diversification, mergers and acquisitions, and alliances work?

            There are many strategies businesses use to gain or maintain a competitive advantage. Some of the strategies include, but are not limited to, vertical integration, (product) diversification, mergers and acquisitions (M&A), and alliances. Each of these options provides a different benefit to the companies under the optimal conditions. Therefore, a company should carefully examine each one and determine if and how it supports their strategic plan.

Mergers and acquisitions (M&A) are an age-old technique in the business world for accessing complimentary businesses or removing a potential competitor.  Chae et al. (2022) contend that the success of an M&A is firmly linked to the synergies between their supply chains. This argument could be applied to manufacturing or services companies if you view clients as a supply chain. The research is not unanimous in this subject. Benitez et al. (2018) discovered that post M&A benefits were found with firms that had similar supply chains pre-M&A. This would indicate synergy lies in similarity, not diversity. Rogan and Sorenson (2014) discovered that firms who shared customers prior to the acquisition did not experience as strong post M&A performance. This is an important factor that should be considered in the lead up to a decision for an M&A.

Vertical integration is the practice of an organization taking direct ownership of various stages of its production process rather than relying on external contractors or suppliers (Hayes et al., 2003). This practice is undertaken for several reasons. One may be quality control or just control of the larger supply chain which impacts their operations and timing. Orsdemir et al. (2019) examined corporations executing a vertical integration strategy to secure their corporate social and environmental responsibility (CSER). For large corporations who have the capital to expend and are reliant on CSER scores, this is a viable option. Small and medium enterprises (SME’s) may not be able to vertically integrate owing to the extensive capital expenditures required.

In conclusion, it is evident that any of the aforementioned integration strategies can have a positive impact on organizational performance. While some strategies are better suited to certain businesses, all aspects must be considered prior to executing a strategy. In the case of M&A, the supply chains and customer bases must be examined to determine if there is synergy or if it would result in destructive interference. For vertical integration, there are numerous benefits and pitfalls. Not every company is positioned to vertically integrate  due to the costs, but those that can afford it may reap the benefits of quality control and supply chain management for their entire operation.

References

Benitez, J., Ray, G., & Henseler, J. (2018). Impact of information technology infrastructure

flexibility on mergers and acquisitions. RUN. https://run.unl.pt/handle/10362/145938

Chae, S., Byung-Gak Son, Yan, T., & Yang, Y. S. (2022). Supply chains and the success of

M&As: investigating the effect of structural equivalence of merging firms' supplier and customer bases. International Journal of Operations & Production Management, 42(8), 1272-1293. https://doi.org/10.1108/IJOPM-12-2021-0745

Hayes, A., James, M., & Munichielo, K. (2003, November 23). Vertical integration explained:

How it works, with types and examples. Investopedia. https://www.investopedia.com/

terms/v/verticalintegration.asp

Orsdemir, A., Hu, B., & Deshpandi, V. (2019). Ensuring Corporate Social and Environmental

Responsibility Through Vertical Integration and Horizontal Sourcing. https://Pubsonline.

informs.org/. https://pubsonline.informs.org/doi/10.1287/msom.2018.0744

Rogan, M., & Sorenson, O. (2014). Picking a (Poor) Partner: A Relational Perspective on

Acquisitions. ResearchGate. https://www.researchgate.net/publication/261331949_Pick

ing_a_Poor_Partner_A_Relational_Perspective_on_Acquisitions