Corporate Strategy: Vertical Integration and Diversification
Corporate strategy, which involves the decisions made in an organization that maintains its competitive advantage both in its specific industry and in the markets, is vital for organizations. I got to learn a lot from the two main aspects discussed; vertical integration and diversification. It is important to note that all these are pushed by the need to grow, which mainly aims to increase a company’s profitability. Vertical integration is where a firm extends to produce its own inputs or own the means of supplying its end products or output. The concept underlying the need to integrate vertically is key to ensuring the success of the integration. Its basis is that a company needs to integrate if an activity’s in-house cost is less compared to the market cost.
The other feature of corporate strategy is diversification, which means that a company has less than 70% of its revenue from one source. The other sources make the diversification related or a conglomerate depending on whether they are linked to the primary source. The core competence- market matrix is one of the key models discussed in the chapter that acts as a guide for reaching decisions in diversification matters. Generally, the strategies derived from the above-mentioned matrix are meant to increase companies’ competitive advantage and, thus, higher performance. However, high and low levels are associated with low performance, while the other medium diversification levels produce high performance.
Nike’s Vertical Integration.
Nike is an American corporation that is among the leading producers of footwear, attire, accessories, and equipment globally. It’s thriving over time can be attributed to the focus on its core competency, which is product design. Moreover, Nike does not make anything; it outsources manufacturing with the main countries benefitting being China and Vietnam. Additionally, nations such as Thailand, Indonesia, Sri Lanka, Pakistan, and Malaysia also account for some considerable amount of their manufactured products. By forward vertical integration, the company will mean that it either drops some of its manufacturers in the countries mentioned above or even drop them all to be fully independent in the process. This is indeed a threat to these companies.
To mention a threat like this, yet they do not have intentions of pursuing it, entering the manufacturing arena will be quite unethical for the corporation. First, it will be against the principle of openness and proper information upheld by ethical standards. This is because by giving this piece of information, the manufacturers will be conscious of their delivery. Hence, they may hastily decide to reduce their manufacturing costs to prevent Nike from pursuing its threat. The outcome of this will be increased profits by Nike at the expense of the manufacturers. Gaining at the expense of others is also against what ethics promotes.
However, Nike may seriously consider forward integrating into the manufacturing arena. This is because it may enjoy benefits such as low manufacturing costs. This may be achieved by, for example, the purchase of customized machines that suit their designs. Furthermore, it will help improve the quality of the products since they will be the ones to design them and also carry out the manufacturing process.