A growth strategy means increasing the level of the organization’s operations. This includes such popular measures as more revenues, more employees, and more of the market share. Growth can be achieved through direct expansion, a merger with similar firms, or diversification. Firms like Wal-Mart and McDonald’s have pursued a growth strategy by way of direct expansion. When Texaco absorbed Gulf Oil, it chose the merger route to growth. When Philip Morris bought General Foods, it was using diversification to achieve growth.
Business growth strategies seek greater size and the expansion of current operations. Wal-Mart is pursuing a highly aggressive growth strategy. Its competitor, Target, is doing the same. These strategies are popular in part because growth is necessary for long-run survival in some industries. Many managers also equate growth with effectiveness, although this is not necessarily true.
There are different ways to pursue growth. Some organizations try to grow internally through some form of concentration-that is, by using existing strengths in new and productive ways, but without taking the risks of great shifts.
A second set of business growth strategies includes actions that can change the basic nature of an organization. They pursue growth through some form of diversification-the acquisition of new businesses in related or unrelated areas, or investment in new ventures. Along with the growth diversification makes possible, it can also bring the complications of operating in new and often unfamiliar business areas. The added risk may be justified for organizations that are limited by environments of strong competition, have restricted access to markets, or are experiencing uncertainties in supply and distribution channels.
A commonly used term among organizational strategists is Integration, the unified control of a number of successive or similar operations.
The combining of companies is an example of integration. Integration also includes a company’s taking over a portion of an industrial or commercial process that previously was accomplished by other firms. Integration doses not involve ownership; it may include only control. Thus, supply and marketing contracts are forms of integration. Integration toward the final users of a company’s goods or services, as when Tandy Corporation opened its Radio Shack stores, is forward integration. A company’s taking control of any of the sources of its inputs, including raw materials and labor, is backward integration.
Southland Corporation’s purchase of a petroleum refinery that supplies gasoline to the company’s 7-Eleven stores is an example of backward integration. Buying or taking control of competitors at the same level in the production and marketing process is horizontal Integration. For example, when Firestone, already in the auto service business, took over J.C. Penney’s auto service centers, horizontal integration occurred.
Integration can extend beyond the boundaries of the United States. AT&T’s joint ventures with Italtel, an Italian telecommunications company, and Philips, a Dutch telecommunications company, are examples of backward integration. These joint ventures established AT&T as a major player in the European telecommunications market.
Following are some of the competitive advantages of integration:
- Improved marketing and technological intelligence.
- Superior control of the firm’s economic environment.
- Product differentiation advantages.
- Knowledge transfer.
- Risk reduction
Each type of integration can be a strategy for accomplishing a different objective. For example, if the objective is to decrease the cost of inputs, a company could buy out suppliers that earn profits producing the inputs an example of backward integration. If the objective is to increase market share, horizontal integration might be attempted. This was done when 7-Eleven’s parent, Southland Corporation, bought the Pak-A-Sak convenience store chain.
Backward and forward integration are usually designed to accomplish one or both of two purposes: capturing additional profits and obtaining better control. Backward integration does this for the supply channels, and forward integration does it for the distribution channels. Obviously, if either a supplier or an intermediate customer is making exorbitant profits, vertical integration may be justified on this basis alone. Vertical integration may also be justified when a company believes it can perform the functions of suppliers or intermediate customers effectively and efficiently. But if better control of sources of supply or distribution channels is the only objective, it may be better not to buy the business. There may be better ways to ensure control, such as making franchise agreements with intermediate customers and long-term supply agreements with suppliers. Taking over customers or suppliers is costly, and it often involves the company in businesses with which its managers are unfamiliar.
Forward integration, backward integration, and horizontal integration are sometimes collectively referred to as vertical integration strategies. Vertical integration strategies allow a firm to gain control over distributors, suppliers, and/or competitors.
- Forward Integration:Forward integration involves gaining ownership or increased control over distributors or retailers. A company that is betting a large part of its future on forward integration is Coca-Cola. An effective means of implementing forward integration is franchising. Approximately 2,000 companies in about fifty different industries in the United States use franchising to distribute their products or services. Businesses can expand rapidly by franchising because costs and opportunities are spread among many individuals.
- Backward Integration: Both manufacturers and retailers purchase needed materials from suppliers. Backward integration is a strategy of seeking ownership or increased control of a firm’s suppliers. This strategy can be especially appropriate when a firm’s current suppliers are unreliable, too costly, or cannot meet the firm’s needs. More and more, consumers are buying products according to environmental considerations which include recyclability of the package. Some firms are thus using backward integration to gain control over suppliers of packages. Some industries in the United States (such as the automotive and aluminium industries) are reducing their historical pursuit of backward integration. Instead of owning their suppliers, companies negotiate with several outside suppliers. Global competition is also spurring firms to reduce their number of suppliers and to demand higher levels of service and quality from those they keep.
- Horizontal Integration: Horizontal integration refers to a strategy of seeking ownership of or increased control over a firm’s competitors. One of the most significant trends in strategic management today is the increased use of horizontal integration as a growth strategy. Mergers, acquisitions, and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies. The trend towards horizontal integration seems to reflect strategists’ misgivings about their ability to operate many unrelated businesses.