Which way to grow?
The question is, should the company expand horizontally or should the company diversify or expand vertically? There is no clear cut answer to this question. There are advantages and pitfalls to each of these methods and there are many examples of organisation where a certain choice has proven extremely profitable and vice versa. This essay will provide advantages and disadvantages of horizontal expansion by comparing it with vertical and diversified growth. The reader will be presented with the facts and at the end will be allowed to make his own decision. One major deciding factor on growth strategy will be the organisations long term strategy and the behaviour of the Markets, and its competitors.
Horizontal expansion as well as other forms, can occur in a number of methods, this includes firm spending its own profits to expand its business or by acquisitions and mergers with companies operating in the same stage of the vertical production chain. This can be in the same market or in markets in other countries for example the takeover of O2 by a Spanish company called Telephonica. This strategy of expansion is useful when the firms’ main objective is to increase sales by producing and distributing more of the firms existing products, the advantage is that the company can exploit economies of scale, reducing overheads and expenses. But each company will have a limit to its economies of scale before it starts to experience diseconomies of scale. The company will become too large and this will make it ridged and inflexible to changes in customer demands and market conditions.
If the company expands through merger and acquisitions, the competitive pressure will be reduced as their will be one less rival in the market. This will increase the firms control over the market and could provide a competitive edge. However the disadvantage of this option is that the firm has “all its eggs in one basket” and if the market declines or demand falls the company will suffer and will be unable to offset its losses, this is why most companies in today’s UK market are diversifying; an example is Tesco, it does not just provide groceries it also provides finance related products.
Expanding in other countries can be seen as a method of offsetting your losses in one country. If one country takes a dip in a certain market the other countries market may remain stable. There is an advantage in globalization and internationalising their operation and reducing cost but this is also an advantage of vertical and diversification on an international scale.
Since mergers and acquisitions lead to the reduction in the number of substitutes, it may be likely that the elasticity of demand is reduced. When competition is reduced, price wars are less likely and firms are likely to increase prices, rather then decrease prices, trying to move from a perfect competition scenario to a more profitable monopoly. The fewer the number of players in the market the easier it becomes to form cartels control supply and bully new entrants to the market. The airline industry tried to do this for a number of years to prevent low cost airlines from entering the market. The mergers and acquisitions are closely monitored by the competition commission to prevent large firms from exploiting consumers.
Apart from favourable price elasticity of demand horizontal growth is effective in exploiting revenue growth. Growing demand could stimulate organic growth as more consumers move into the market, a firm can invest in more productive assets to produce supply and satisfy demand. Retail outlets of mobile phones suddenly appeared on the high street to exploit rapid increase in customers. However sooner or later the market will become saturated and profit will become more difficult to obtain. The advantage of diversification in other fields is that the company can invest to pursue growth opportunities and increase shareholders wealth, these companies...
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