4.10 Diversification and Integration

Businesses acquire and merge with other businesses to improve their competitive position.  It could be to improve their supply chain, gain access to other customers, or expand their product/service line.

Diversification

Single Product Strategy
With strategy a business doesn’t expand into new areas.  It puts all its eggs in one basket and watches it like a hawk.

Related Diversification
A related diversification strategy is where a business expands into other areas with a similar technology, marketing, brand name, or customers.  The goal is to take advantage of synergy.  A good example of related diversification is Disney.  Disney owns media production, theme parks, and sells retail merchandise.  Together they are more profitable than each on their own.  When Disney comes out with a movie such as Frozen, it can sell the merchandise and also incorporate characters into its theme parks.

Unrelated Diversification
Here, product lines and businesses are not related and there is no synergy.  GE produces medical technology as well as hydro generators.  There is no synergy between them.

Mergers and Acquisitions

Mergers and acquisitions, known as M&A, are used to help a business expand and take advantage of opportunities.  M&A comes in three flavors.

Vertical integration
Vertical integration is when a business expands by incorporating another business in the value chain of its existing business.  For example, a business that doesn’t manufacture its product could acquire a manufacturing facility.  That is what would happen if Apple bought Foxconn, the company that manufactures its products. That is an example of backward integration.  A business might also acquire another business that is closer to the customer.  That is what happened when Coca-Cola and Pepsi bought bottlers.  That is an example of forward integration.

Horizonal integration
Horizontal integration or mergers are those when a company buys another company in the same line of business.  For example when Daimler Benz bought Chrysler.

Conglomerate
A conglomerate is when two unrelated companies merge or are acquired.  GE is an example of a conglomerate.  It makes medical technology, large generators, and used to have household appliances.