The Strategic Gains from Horizontal Integration and Diversification
CHAPTER 9: THE STRATEGIC GAINS FROM HORIZONTAL INTEGRATION AND DIVERSIFICATION
Work, itself, is not organised as it used to be. Organisations are not now drawn as pyramids of boxes. [They] now have circles and amoeba-like blobs where boxes used to be. It isn’t even clear where the organisation begins and ends, with customers, suppliers and allied organisations linked into a varying ‘network organisation?
Charles Handy, The Empty Raincoat (1994)
The acid test of competitive success is the ability of the firm to generate cash flow for the shareholders in the long run. Yet the successful firm ultimately runs into barriers defined by the natural limits of expansion in its chosen domain. Some companies, such as General Motors, Toyota, Boeing and Microsoft, have remained focused due to the unique nature of their business. GM, Toyota and Boeing are in large fixed cost businesses with little relevant spillovers and mature demand, while Microsoft operates in a market still in the growth phase of its industry life cycle. It would hardly pay for Microsoft to abandon the growing software market to move on to some other venture. However, even these companies have ‘diversified’ themselves over the years. Boeing moved from military applications to civilian airline production after World War II. Although done at different points in time, both Toyota and GM have expanded their model base and moved production to new markets. Microsoft moved out of operating systems into spreadsheets, word processing and database management programs, and is now expanding its presence in the network architecture market. At some stage in the firm’s development, management face a critical decision: do we pay the net cash flows out as dividends or do we seek new investment opportunities? Rarely, if ever, does management make the decision to liquidate the company, believing that new investment opportunities always exist. Some experts view this as little more than managerial hubris sustainable only by
Work, itself, is not organised as it used to be. Organisations are not now drawn as pyramids of boxes. [They] now have circles and amoeba-like blobs where boxes used to be. It isn’t even clear where the organisation begins and ends, with customers, suppliers and allied organisations linked into a varying ‘network organisation?
Charles Handy, The Empty Raincoat (1994)
The acid test of competitive success is the ability of the firm to generate cash flow for the shareholders in the long run. Yet the successful firm ultimately runs into barriers defined by the natural limits of expansion in its chosen domain. Some companies, such as General Motors, Toyota, Boeing and Microsoft, have remained focused due to the unique nature of their business. GM, Toyota and Boeing are in large fixed cost businesses with little relevant spillovers and mature demand, while Microsoft operates in a market still in the growth phase of its industry life cycle. It would hardly pay for Microsoft to abandon the growing software market to move on to some other venture. However, even these companies have ‘diversified’ themselves over the years. Boeing moved from military applications to civilian airline production after World War II. Although done at different points in time, both Toyota and GM have expanded their model base and moved production to new markets. Microsoft moved out of operating systems into spreadsheets, word processing and database management programs, and is now expanding its presence in the network architecture market. At some stage in the firm’s development, management face a critical decision: do we pay the net cash flows out as dividends or do we seek new investment opportunities? Rarely, if ever, does management make the decision to liquidate the company, believing that new investment opportunities always exist. Some experts view this as little more than managerial hubris sustainable only by