FREE online courses on Corporate Strategies - Related Diversification - Corporate Relatedness
Over time, most companies develop intangible resources
(such as know-how) that can become a foundation for capabilities and core
competencies that are competitively valuable. In diversified companies, these
core competencies generally are made up of managerial and technical knowledge,
experiences, and expertise.
A company's marketing expertise is such a core competence,
and transferring such a competence between business units may result in reduced
costs and an increase in the company's overall strategic competitiveness because
any costs related to developing the competence already have been incurred and
competencies based on intangible resources, such as marketing know-how, are less
visible and therefore are more difficult for competitors to understand and
imitate
One way that companies can facilitate the transfer of
competencies between or among business units is to move key personnel into new
management positions in the receiving unit.
However, such transfers may be difficult to implement
successfully or without incurring significant costs. Top managers may be
reluctant to support the transfer of key personnel to the new business. Key
personnel who have been selected for transfer either may not want to transfer or
may demand a premium.
In addition to transferring core competencies to acquired
businesses, companies also may use their core competencies as they try to
achieve a sustainable competitive advantage in new businesses. But, these attempts are not always
successful.
Companies also may implement related diversification
strategies in an attempt to gain market power. Market power exists when a
company is able to sell its products at prices above the existing competitive
level or decrease the costs of its primary activities below the competitive
level, or both. Market power
through diversification may be gained through multipoint competition, a
condition where two or more diversified companies compete in the same product
areas or geographic markets.
If companies compete aggressively with each other in their
common markets, excessive competitive activity may wipe out any potential gains.
Thus, such companies often may refrain from competition to create value by
entering into a condition known as mutual forbearance and gain value through
reducing competition in key markets.
Companies also might gain market power by following a
vertical integration strategy. Vertical integration exists when a company
produces its own inputs (backward integration) or owns its own source of
distribution of outputs (forward integration).
A vertical integration strategy may be motivated by a company's desire to
strengthen its position in its core business relative to competitors by
increasing its market power. Vertical integration enables a company to increase
market power through savings realized on the cost of acquiring inputs, lowering
operations costs, increasing control over processes and activities, avoiding
market costs, and protection of technology. Depending on the extent that the
company is vertically integrated, companies may be able to reduce transactions
costs, eliminate supplier or distributor markups, and improve profit margins.
However, like other strategies that create value and aid
the company in achieving strategic competitiveness, vertical integration may not
be the perfect answer because of risks and costs that accompany it.
Outside suppliers may be able to provide inputs at a lower
cost (and, possibly also of a higher quality). The costs of coordinating
vertically integrated activities may exceed the value of the control that is
realized. Vertical integration may result in the company losing strategic
competitiveness if the internal unit does not keep up with changes in
technology. To vertically integrate, the company may be required to build a
facility with capacity that is beyond the ability of its internal units to
absorb, forcing the manufacturing-selling unit to sell to outside users in order
to achieve scale economies. A
significant reduction in demand would make vertical integration uneconomical.
However, it should be noted that, while vertical
integration can create value and contribute to strategic competitiveness
(especially from the perspective of market power), it is not a strategy that is
without risks and costs. It can
create strategic inflexibility in the sense that there is too high an exposure
to one single industry and managing all the processes together to remain cost &
technologically competitive may not be practically feasible.