1 strategic growth options

Corporate-level Strategies Options

I. GROWTH STRATEGIES
A. Concentration
1. Market development
2. Product Development
3. Horizontal Integration
B. Vertical Integration
1. Backward integration
2. Forward integration
3. Diversification
C. Diversification
1. Concentric
2. Conglomerate
D. Implementation of Growth Strategies
1. Internal growth
2. Acquisition
3. Mergers
4. Alliances
II. STABILITY STRATEGY
III. ENDGAME STRATEGIES
IV. DEFENSIVE STRATEGIES

A. Turnaround
B. Divestment
C. Liquidation
D. Bankruptcy
E. Captive
2. COMBINATION STRATEGIES

Corporate Growth Strategies

Growth strategies are extremely popular because most executives tend to equate growth with success.
Howevere, in order for an organization to grow, it must generate surplus. This surplus can be used in many
ways. For example, it can be used to augment worker and management wages, salaries, and bonuses or held
in income-generating reserve. Surplus can also be distributed in dividends to stockholders, or it could be used
to reduce future prices of goods or services. Finally, surplus can be used for either internal or external growth.

Internal growth may take place through increasing sales, by introducing new products and services while
retaining the old. Horizontal internal growth involves creating new companies that operate in the same
business as the original firm, in related businesses, or in unrelated businesses. Vertical internal growth refers
to creating businesses within the firm's vertical channel of distribution and takes the form of supplier-customer
relationships.

External growth can be accomplished through merger or acquisition, joint venture, and vertical integration.
Firms may select a growth strategy; this growth can refer to any of the following:

 growth in profits;
 growth in market share;
 growth in size as measured by assets or sales;
 growth in geographical area;
 growth in the number of businesses or products.

In the following sections, several growth strategy options are described.

Concentration
Concentrated growth strategies are strategies that center on improving current products
and/or markets without changing any other factors. The firm directs its resources to the
profitable growth of a single product, in a single market, and with a single technology.

A strategy of concentration allows for a considerable range of action: the business can
attempt to capture a large market share by increasing present customer's rate of usage, by
attracting competitors' customers, or by interesting nonusers in the products or services.
There are basically three approaches to pursuing a concentration strategy: market
development, product development, and horizontal integration.
Market Development
Market development involves introducing present products or services into new geographic
areas. Several specific approaches are listed in Figure 8-1.

Product Development
Product development is a strategy that seeks increased sales by improving or modifying present products or
services. Product development implies modifications or additions products in order to increase their market
penetration within existing customer groups. The idea is to attract satisfied customers to new products as a
result of their positive experience with the company's initial offering. The bottom section in Figure 8-1 lists
some of the many specific options available to businesses undertaking product development. Product
development usually entails large research and development expenditure.

Horizontal Integration
One of the most significant trends in strategic management today is the increased use of horizontal integration
as a growth strategy. Horizontal integration occurs when a firm acquires or merges with a major competitors,
or at least another firm operating at the same stage in the added value chain. The corporation's objective may
be to become more efficient through larger economies of scale, to enter another geographic market, or simply
to reduce competition for suppliers and customers. Market share will increase, and pooled skills and capabilities
should generate synergy.

Kenneth Davidson makes this observation about horizontal integration:

The trend towards horizontal integration seems to reflect strategists misgivings about their ability to operate
many unrelated businesses. Mergers between direct competitors are more likely to create efficiencies than
mergers between unrelated businesses, both because there is a greater potential for eliminating duplicate
facilities and because the management of the acquiring firm is more likely to understand the business of the
target.

A concentration strategy usually has the advantage of low initial risk because the organization already has
much of the knowledge and many of the resources necessary to compete in the marketplace. This strategy
allows the organization to focus its attention on doing a small number of things extremely well.

The major drawback to a concentration strategy is that it places all or most of the organization's resources in
the same basket. If sudden change occur in the industry, the organization can suffer significantly.

Concentration On Single Product Or Services

Concentration on a single product or services entails increasing sales, profits, or market share faster than it
has increased in the past.

William D. Guth identifies seven key growth strategies from the point of view of a single-product-line business
firm.

Hold relative position in high-growth product / market area

The growth associated with this strategy is directly attributable to the growth in demand for the
product/service being produced by the firm. The funds to support the growth are typically derived
from operations, from debt financing, and, periodically, from equity financing. This strategy involves
an ability to remain competitive in terms of product development, promotion and advertising, and
distribution, as well as in terms of productive capacity. A principal risk of the strategy is that a
competitor may embark on a preemptive strategy designed to capture market share.
Increase market share in high-growth market
The preemptive strategy is the principal way for commodity-type products to increase market share in
high-growth markets. Essential to the success of the preemptive strategy is "getting there first." The
range of options is wide. These options include: differentiation of products, aggressive investment in
advertising, distribution, and so forth. Essential to the success of these strategies is doing things not
easily and swiftly duplicatable by the firm's competitors.
Increase market share in mature market
Two major approaches may be employed to capture market share in slow-growth markets: (1) one is
to "rationalize production" to achieve cost leadership (e.g., price reduction, or reducing the number of
models in the product line); (2) the other is to segment the market in search for high-growth potential
segments. The reallocation of resources to the various segments must result in a product mix which in
the aggregate is superior to that of competitors in terms of growth potential.
Hold strong relative position in mature market [slow-growth]
Use "excess" cash flow, funds capability, and other resources to support penetration of multinational
markets with existing product line. Strategies of multinational market penetration typically expose
firms to a wide variety of patterns of opportunity and risk. Each foreign country has its unique pattern
 of culture, social and economic development, and politics which often requires the development of a
unique approach to market penetration and development.
Hold strong relative position in mature(ing) market
Use "excess" cash flow, external funds capability, and other resources to support penetration of new-
product/market areas domestically. Managers of firms deciding to diversify their firm's resources by
moving into new-product/market areas can do so either by developing new products internally or by
acquiring firms with already developed products and market positions.
Internally developed new products will be related to the marketing, production, and/or technological
capabilities of the firm. Generally, firms with relatively large and long-lived research and development
staffs have the greatest potential for successfully developing new products internally.

Firms which decide on a strategy of product/market diversification through acquisition must further
decide on whether such diversification must be related to the firm's existing functional resources and
capabilities, or essentially unrelated. In the case of related diversification, each acquisition must be
regarded as building or extending one of more of the existing functional resources or capabilities (e.g.,
marketing, production, research, and development). Each acquisition in a pure unrelated
diversification strategy is analyzed exclusively as a portfolio investment decision. So long as the
criteria of shareholders wealth improvement and a desirable risk-return balance are met, an
acquisition can be justified under this types of strategy. Unrelated diversification as a growth strategy
is most often considered by firms that have found it difficult to identify significant growth potential in
related areas.

Hold strong relative position in multinational markets with present product line
Use "excess" cash flow, funds capability, an other resources to diversify products. Opportunities for
successful product diversification may vary significantly from one geographic are to another. Firms
may choose to allow wide variation in product-diversification approaches between geographic areas.
Alternatively, firms may choose to identify one of several product- diversification approaches which
provide varying amounts of opportunity in the various geographical areas.
Hold strong relative position in diversified product-line domestically
Use "excess" cash flow, funds capability, and other resources to diversify markets. With this strategy,
additional complexity is involved due to the existence of several lines rather than one product line. As
with growth strategy 4 and 6 discussed above, organization problems are plentiful in relation to this
complex strategy.
The strategies listed at the beginning are relevant in its early stage of potential development; those strategies
listed at the end are relevant to its most advanced stage of potential development.

Vertical Integration Strategies

Vertical integration is a growth strategy that involves extending an organization's present business in two
possible directions:

If a business integrates by moving into an area that serves as suppliers, the process is referred to as backward
integration. In internal backward integration, the firm creates its own sources of supply, perhaps by
establishing a subsidiary company. The external approach involves the purchase or acquisition of an existing
supplier.

If a business integrates by mowing into an area that serves as a customer or user of its products or services,
the process is referred to as forward integration. A firm can accomplish forward integration internally by
establishing it own production facility (if it is a supplier of raw materials), sales force, wholesale system, or
retail outlets. External forward integration can be accomplished by acquiring firms that presently perform the
desired function.

The reasons for choosing a vertical integration strategy are more varied and sometimes less obvious. If a firm
believes that it is paying more for materials than it would cost to produce its own, the temptation to integrate
vertically is great. The attraction is still greater if getting materials from a supplier on time has been a problem
or is expected to become problem.

Therefore, the main reason for backward integration is the desire to increase the dependability of supply or
quality of raw materials or production inputs.

The rationale for forward vertical integration is similar: cost and effectiveness. Greater control over marketing
and closer coordination between distribution channels and manufacturing may improve sales. Forward
integration is a preferred strategy if the advantages of stable production are particularly high.

However, both backward and forward vertical integration require investment generate a commensurate return.
Particularly, backward vertical integration into raw and commodity materials may require a huge investment.
Operation may have to reach a level of output that affords economies of a scale or otherwise be uneconomical
to operate.

Moreover, for vertically integrated firms, the risks result from expansion of the company into areas requiring
strategic managers to broaden the base of their competencies and assume additional responsibilities .
Therefore, organizations should adopt a vertical integration strategy with caution because integrated
organizations have become associated with mature and less profitable industries. Escape from these industries
is particularly difficult for a large, vertically integrated organization.

The main lessons to be learned with regard to vertical integration are that:

Critical complementary assets must be owned (mainly when they are specialized for the needs of the firm),
unless their is a cash constraint. In this last case, the firm should try to form a partnership with at least a
minority position.

When critical complementary assets are not owned, the firm should secure early access to them, mainly when
its product is not protected by a thigh regime of appropriability (it is an easy matter to copy it), and when the
capability of complementary assets is in short supply and may become a bottleneck.

Vertical integration involves a set of decisions that, by the nature of their scope, reside at the corporate level
of the organization. Some of these decisions are discussed below.

Formulating Vertical Integration Strategies

Vertical integration has been an important managerial innovation and a necessary technological step in
developing certain industries, but it may not be appropriate in the same form under all circumstances.

As any other crucial decisions that has significant strategic importance, vertical integration is affected by
complex trade-offs. All of the benefits that support a movement toward increased vertical integration have to
balanced against potential costs.

The Dimension Of Vertical Strategy

In any vertical integration strategy, conscious (or unconscious) decisions are made regarding:

Breadth Of Integrated Activities

The breadth of integrated activities is the number of tasks that firms perform in-house. Traditional concepts of
vertical integration did not address the number of integrated activities that firms might undertake. Figure 8-2
contrasts the old view, represented by firm A, with examples of the expanded concept of vertical integration
represented by firms B and C.

Stages Of Integrated Activities

Figure 8-2 shows that firm A has more stages that firms B or C, because its activities extend from ultra-raw
materials to retail outlets, but firm C is engaged in a greater number of steps in the vertical chain.

Degree Of Internal Transfers

The degree of integration is the proportion of the resources transferred internally, and fully integrated firms
transfer almost 100 percent of particular services or material in-house. In Figure 8-2 firms A and B are "fully
integrated"; firm C is "taper integrated".

Form Of Ownership Arrangement

Figure 8-2 does not illustrate different forms of ownership. But the form of integrated ownership indicates the
proportion of a firm's equity invested in a vertically linked venture, and in some environments contracts,
franchises, joint ventures, or other forms of quasi-integration can be good alternatives to wholly-owned
ventures.

Vertical Integration Strategy Alternatives

A study by Kathryn Harrigan reveals several alternatives that encompass the dimensions of vertical integration
strategy. These alternatives are:

Nonintegration
Strategies for attaining materials and markets with no internal transfers and no ownership are like contracts.
They are especially attractive when firms are reluctant to buy specialized assets, need to lower breakeven
points because of underdeveloped demand, or can arrange delivery schedules with suppliers (or distributors)
as though they were extensions of the firm's assets.

Quasi-integration
Quasi-integrated firms need not own 100 percent of the adjacent business units in the vertical chain. The bond
between firms could take the form of cooperative ventures, minority equity agreements, loans or loan
guarantees prepurchase credits, specialized logistical facilities or "understandings" concerning customary
arrangements. Quasi-integrated arrangements place greater proportions of ownership equity at risk, but they
also provide greater flexibility in responding to changing conditions than a contract may provide.

Taper Integration
Firms are "taper integrated" when they are backward or forward integrated but rely on outsiders for a
proportion of their suppliers or distribution. Taper integration represents a useful compromise between desires
to control adjacent businesses and needs to retain strategic flexibility. In this case, firms can monitor the R&D
developments of outsiders, reduce vulnerability to strikes and shortages within their systems, and examine the
products of competitors while enjoying the lower costs and greater advantages (and profit margins) or vertical
integration.

Full Integration
Full integration can be used effectively if price competition is not fierce, diseconomies from temporary
imbalances are not significant, and little hardship occurs from being cut off from outside market or
technological intelligence. Full ownership risks the greatest proportion of equity, but many firms believe it is
easier to manage that contractual or quasi- integrated relationships and prefer it over them.

Breadth And Stages Of Integration

Being broadly integrated also offers firms opportunities to capture large profit margins. Firms that engage in
several vertical stages for each integrated activity they undertake can enjoy synergies at several diverse levels
within their organizations. Particular combinations of the breath of activities integrated, number of stages
undertaken, degree of internal transfers, and form of ownership control are more likely to be successful for
certain firms than other depending on: (1) the uncertainty surrounded sales growth, industry infrastructure,
and other market traits; (2) the likelihood that the industry in question will undergo radical technological
change, serve price warfare, or other structural changes causing competition to be volatile; (3) the power of
firms to bargain, cajole, or pressure suppliers (or distributors) into performing value adding tasks for them;
and (4) firm's strategy needs.

Factors Affecting Vertical Strategies

Four key factors are hypothesized to affect the vertical integration strategies that firms embrace:

1. force propelling industry evolution and exacerbating demand uncertainty

2. the nature of competition in the linked industries
3. the bargaining power of suppliers or distributors (and customers)
4. corporate strategy requirements.

Vertical integration is not a costless strategy. However, the key to successful use of vertical integration is
recognizing when and where it offers significant competitive advantages and forging the necessary vertical
linkages without creating excessive risks.

Diversification Strategies
Diversification occurs when an organization moves into areas that are clearly differentiated from its current
businesses.

Diversification growth strategies may be appropriate for firms that cannot achieve their growth objectives in
their current industry, with their current products and markets. Other reasons for a firm to diversify include the
following:

1. Markets of current business(es) are approaching the point of saturation or decline of the product life
cycle.
2. Current business(es) are generating excess cash that can be invested elsewhere more profitably.
3. Synergy is possible from new business (for example, because of common component part, costs can
be spread among more units).
4. Antitrust regulations prohibit expansion in present industry.
5. A tax loss can be acquired.
6. The international sector can be entered quickly.
7. Technical expertise can be gained quickly.
8. New, experience executives can be attracted or current executives can be held (for example, if they
are productive but bored).

But, whatever the reason for diversification, the firm must define the role of each business within the
enterprise - successful diversification is not mere aggregation (which may come as a surprise to certain
conglomerates).
According to Peter Drucker, "attempts to diversify without either a foundation in common market or in common
technology are doomed to frustration."

He further concludes that diversification to make a business "countercyclical" - balancing the cycles of one
industry with those of another - rarely works, nor do attempts to marry businesses with high demands for
capital with those having a high cash throw off; the balance tends to change with time, invalidating the reason
for the diversification.

There is one absolute requirements for successful diversification: unity values. The business unit's climate and
values must be compatible and there must be "respect" for the businesses.

Most diversification strategies can be classified as concentric diversification and conglomerate diversification.

Concentric Diversification
Adding new, but related, products or services is widely called concentric diversification. The corporation's lines
of business still possess some "common thread" that serves to relate them in some manner. The point of
commonality may be similar technology, customer usage, distribution, managerial skills, or product similarity.

Concentric diversification occurs when the diversification is in some way related to, but clearly differentiated
from, the organization's current business.

The basic difference between a concentric diversification and a concentration strategy is that a concentric
diversification strategy involves expansion into a related, but distinct, area whereas concentration involves
expansion of the current business.

A concentric diversification strategy can have several advantages. The most obvious is that it allows the
organization to build on its expertise in a related area. A related diversification strategy involves diversifying
into businesses that possess some kind of "strategic fit."

Strategic fit exists when different businesses have sufficiently related activity-cost chains that there are
important opportunities for activity sharing in one business or another.

A diversified firm that exploits these activity-cost chain interrelationships and captures the benefits of strategic
fit achieves a consolidated performance greater the sum of what the businesses can earn pursuing independent
strategies.

This effect which can produce a combined return on the firm's resources greater than the sum of its part is
frequently referred to as synergy (the 2 + 2 = 5 effect).

Conglomerate Diversification /unrelated Diversification/ Strategies

Conglomerate diversification is growth strategy that involves adding new products or services that are
significantly different from the organization's present products or services. Conglomerat diversification occurs
when the firm diversifies into an area(s) totally unrelated to the organization current business.

Most conglomerate diversifications are based on the rationale that expansion into unrelated industries has a
very attractive potential:

"... the basic premise of unrelated diversification is that any company that can be acquired on good financial
terms represents a good business to diversify into" (Thompson and Strickland ).

Typically, corporate strategists screen candidate companies using such criteria as:

 Whether the business can meet corporate targets for profitability and return on investment.
 Whether the new business will require substantial infusions of capital to replace fixed assets, fund
expansion, and provide working capital.
 Whether the business is in industry with significant growth potential.
 Whether the business is big enough to contribute significantly to the parent firm's bottom line.
 The potential for union difficulties or adverse government regulations concerning product safety or the
environment.
 Industry vulnerability to recession, inflation, high interest rates, or shifts in government policy.

Three types of companies make particularly attractive acquisition targets:

 Companies whose assets are "undervalued" - opportunities may exist to acquire such companies' for
less than full market value and make substantial capital gains by reselling their assets and businesses
for more than their acquired costs.
 Companies that are financially distressed.
 Companies that have bright growth prospects but are short on investment capital.
Unrelated diversification has appeal from several financial angles:

 Business risk is scattered over a variety of industries, making the company less dependent on any one
business.
 Capital resources can be invested in whatever industries offer the best profit prospects; cash from
businesses with lower profit prospects can be diverted to acquiring and expanding businesses with
higher growth and profit potentials. Corporate financial resources are thus employed to maximum
advantage.
 Company profitability is somewhat more stable because hard times in one industry may be partially
offset by good time in another.
 To the extent that corporate managers are astute at spotting bargain-priced companies with big
upside profit potential, shareholder wealth can be enhanced.

However, there are two biggest drawbacks to unrelated diversification: the difficulties of managing broad
diversification and the absence of strategic opportunities to turn diversification into competitive advantage.

Despite these drawbacks, unrelated diversification can be a desirable corporate strategy.

Unrelated Diversification And Shareholders Value

Related diversification represents a strategic approach to value creation because it is predicated on exploiting
the links between the activity-cost chains of different businesses to lower costs, transfer skills and
technological expertise, and gain benefit of other kinds of strategic fit.

In contrast, unrelated diversification represents a financial approach to diversification where shareholder value
accrues from astute deployment of corporate financial resources and from executive skill in spotting financially
attractive business opportunities.

For unrelated diversification to result in enhanced shareholders value, corporate strategists must exhibit
superior skills in creating and managing a portfolio of diversified business interests.

Implementation Of Growth Strategy

A company can grow in three fundamental ways, and all companies must choose among these options.

 The first option is to expanded internally.

 The second option is growth through mergers and acquisitions.
 The third growth option is alliances.

These growth options should match the right strategic and operational "fit" to the right structure.

There are three modes of organization: internal, extended, and external.

The Strategic Spectrum

For strategists often the first question is "How do we structure the structure this deal?" Researchers found too
many failed joint ventures and acquisitions where the deal should have been structured as a simple licensing
agreement, or as a contracting manufacturing agreement, or as a basic strategic alliance.

One of the central reason for the wrong choice of structure is an inadequate method of conceptualizing
organizational form to match corporate strategy.

The strategic spectrum is a very valuable tool. It groups various business structures into families with similar
characteristics, and it guides the strategist into easy transitions from one structure to the next. The strategic
spectrum was created which groups all structural options into a range of related forms, from "external"
relationships to "extended" alliances to "internal" organizations.

The understanding of the strategic spectrum can be put into another perspective when we examine the way in
which a company progresses through its stages of growth. Form example, a small, local business typically
begins expanding internally, perhaps establishing vendors and a network of sales representatives. As the
company continues to grow, it might license its proprietary process in return for cash to fund its expansion.

Internal Growth
When a firm expands its current market share, its markets, or its products through the use of internal
resources, internal growth takes place. Internal growth is achieved through increasing a firm's sales,
production capacity, and work force. However, internal growth not only includes of the same business, but in
can also include the creation of new business, either in a horizontal or vertical direction. Horizontal internal
growth involves creating new companies that operate in the same business as the original firm, in related
businesses, or in unrelated businesses. Vertical internal growth refers to creating businesses within the firm's
vertical channel of distribution and takes the form of supplier-customer relationships.

Some firms prefer to growth internally, because they control it most effectively and because, is successful, it
can yield high rewards. Their belief is that internal growth better preserves their organizational culture,
efficiency, quality, and image. However, the internal growth has some limitations. The chief disadvantage to
internal growth is the rising bureaucratic costs the generally accompany internal growth. Moreover, it is
contingent on strong markets, good profit margins, and the ability to hire, train, organize, and control a
continually expanding sphere human recours. It also runs the risk of becoming inbred, and therefore inflexible
or blind to important changes in the competitive environment. Therefore, creating new businesses should only
be undertaken when their benefits will exceed their costs.

Mergers And Acquisitions

Mergers and acquisitions another company can be a major step in carrying out a desired strategy. The acquired
company may provide a much needed resource, give access to a new market, extend company operations back
into earlier stages of production, provide a scale operations that will support improved technology, or improve
company services and productivity.

The Nature Of Mergers And Acquisitions

Merger
Merger refers to a friendly joining together of two organizations as in a corporate marriage, usually with the
sanction of both firm's top strategic decision makers. Mergers are usually based on the core competencies of
firms. For example, two companies with similar core competencies (e.g., in marketing) in marketing may
merge to strengthen their overall competitive position. Alternative, two firms may merge to combine
complementary core competencies. For example, a firm possesses a competency in its marketing may merge
with a firm that has good brand name. The overall reason for a merger is to take advantage of benefits of
synergy.

Acquisition.
Acquisition usually implies and unfriendly or hostile takeover without the sanction of the acquired firm.
Acquisitions may be either horizontal or vertical.

The following paragraphs discuss three kinds of horizontal takeovers and two types of vertical acquisitions.

Horizontal integration involves expanding into the same line of business. There are several reasons for
engaging in horizontal integration. Some of these are:

 One of the primary reasons is to increase market share. Along with increasing revenues, larger
market share provides the company with greater leverage to deal with its suppliers and customers.
Greater market share should also lower the firm's costs through scale economies.
 Increased size enables the firm to promote its products and services more efficiently to larger
audience and may permit greater access to channels of distribution.
 Finally, horizonal integration can result in increased operational flexibility.

Horizontal Related Acquisition.

When a corporation acquires a business that is in an industry outside of its present scope of operations but is
related to the corporation's core competencies, the corporation has engaged in horizontal related acquisition.

Three major potential advantages are associated with horizontal related acquisitions: horizontal scope
economies, horizontal scope innovations, and a combination of the two:

 Horizontal scope economies occur when a firm's multiply business units are able to transfer or share
purchasing, research and development, marketing or other functional activities at a lower total or per
unit cost than would be available if the business units did not share.
 Horizontal scope innovation refers to improvements or innovations that can be transferred or shared
across the corporations's business units.

Horizontal Unrelated Acquisition.

Horizontal unrelated acquisition or conglomerate diversification occur when a corporation acquires a business in
an unrelated industry. Whereas horizontal related acquisitions are based on the premise of strategically
managing and coordinating related businesses to create synergy and value, conglomerate diversification
decisions are made primarily for financial investments reasons.
Conglomerate diversification is simpler than horizontal related acquisition because it is based on analyzing the
financial potential of an enterprise and its industry without concern for the potential synergistic effects of
combining core competencies. However, bureaucratic costs tend to increase with unrelated acquisitions.
Therefore, firms are well advised to undertake a cost-benefit analysis before acquiring unrelated businesses.

Vertical Related Acquisition.

Vertical related acquisition (vertical integration) involves extending the production process back to the source
of supply, or forward to the marketing are.

Four principal advantages are associated with vertical related acquisitions:

 Vertical chain economies may result from eliminating production steps, reducing overhead costs, and
coordinating distribution activities to attain greater synergy.
 Vertical chain/horizontal scope economies can occur when a corporation's horizontally related or
unrelated business units purchase from one of the corporation's business units that serves as a
supplier.
 Vertical chain innovations refer to improvements or innovations that may be transferred or share
among the corporation's business units in the distribution channel.
 A final advantages is a combination of vertical chain economies and chain innovations.

Vertical Unrelated Acquisition.

Vertical unrelated acquisition is undertaken with limited possibilities for transferring or sharing core
competencies. In some cases, however, vertical unrelated acquisitions can result in vertical chain/horizontal
scope economies, vertical chain innovations, and combinations of chain economies and innovations.

Managing vertically unrelated businesses can be associated with two major disadvantages:

 the more vertical businesses the firm owns, the higher the costs of bureaucracy, and perhaps
coordination, are likely to be;
 a firm that commits itself to buying all of its needs internally may pay higher costs by failing to seek
competitive bids from outside suppliers.

Formerly, the term "merger" applied to the consolidation of two companies about equal in size, whereas
"acquisition" implied a larger firm taking over a smaller one. Since this distinctions is no longer consistently
observed, I use the words interchangeably.

The Seven Deadly Sins On Mergers And Acquisitions

The corporate world contains many examples of failed acquisitions. In an examination of the relationship
between business-level competitive advantage and corporate strategy, Michael Porter reported on the
acquisition and subsequent divestiture history of "33 large, prestigious U.S. companies over the 1950-1986
period and found that most of them had divested many more acquisitions than they had kept.

One article offered "The Seven Deadly Sins on Mergers and Acquisitions":

1. Paying too much.

2. Assuming a boom market won't crash.
3. Leaping before looking.
4. Straying too far afield.
5. Swallowing something too big.
6. Marrying disparate corporate cultures.
7. Counting on key managers staying.

If there is a lack of fit between the two organizations it is not unusual for the merger or acquisition to fail and
be dissolved in a subsequent divestiture.

Strategic Approach To Acquisitions

The history of acquisitions shows that many have been unprofitable investments. According to a study by
Michael E. Porter, of more than 2,6000 acquisitions made by thirty-three major U.S. companies from 1950-
1986, more than half of these acquisitions were subsequently divested. What, then, can be done to make the
acquisition process more effective?

According to H. William Ebeling and Thomas L. Doorley, the essential elements of an effective acquisition
process are:
  Stating the firm's strategy. An effective acquisition process flows from a sound strategic planning
process. The process must be active at both corporate and business unit levels to produce the
necessary background for a sound acquisition program.
 Developing acquisition criteria. The criteria should include:
o an upper limit on the scale of the acquisition;
o industries that can't be considered due to the biases of senior management;
o broad activity / technology / skill base definitions where synergy might be found.
 Eliminating inappropriate sectors. Using the established criteria, a broad scan of the economy should
made to eliminate unacceptable industries. The most important criterion to apply correctly is the one
covering synergy with some activity, technology, or skill base.
 Screening for promising sectors.
 Selecting promising candidates. The focus should be on two factors: activity/technology skill base
position and predicted financial performance.

In general, acquisitions can be an effective way to improve the competitive position of a company and create
value for both the stockholder and society at large. To do this, a company's acquisition process must:

 Shift emphasis away from current financial performance and place far more emphasis on competitive
dynamics and the structural positions of potential candidates; and
 Be part an effective overall, ongoing strategic planning process.

The Art Of Acquisitions

However, most acquisition misfires results not from misunderstanding the process of making acquisitions (see
above), but also from neglecting the art in making them. According to Joseph L. Dione, eight guidelines,
derived from McGraw-Hill Inc.'s experience, can help other companies form the building blocks to structure a
successful acquisition:

1. Be sure you know why you want to make the acquisition. The acquisition should reflects the