To what extent is growing through integration with other businesses a good way for a firm to increase its competitiveness? Growing through integration is concerned with mergers and takeovers of businesses. There are a number of different ways of integrating: Horizontal (same industry, same stage of production), backward vertical (same industry towards a supplier), forward vertical (same industry towards the customer) and Conglomerate (different industries).
Growing through integration can have a positive effect on the competitiveness of a business in that firms are able to buy out or merge with other large powers in the market to make a ‘super power’ in the market. This ‘super power’ gains a larger % of the market as the two original market shares of the firms are joined together. A recent example of this is the merger between orange and T-mobile in 2010. This merger saw two of the UK’s biggest mobile phone network providers join together and as a result gain a combined 30 million customers and overtake O2 as the market leaders with 37% market share.
Along with this, the merge allowed customers of the two companies to be able to receive the signal of both of the networks helping to provide a better signal range for the whole of its customer base. The integration of the two businesses therefore helps both orange and T-mobile to provide a better service to their customers which could tempt customers away from their closest rival O2 and gain them even more market share. Therefore the merger has allowed orange and T-mobile to compete with O2 on quality making them more non-price competitive and more desirable to the consumer.
Along with being able to compete on areas other than price the merger could mean that orange and T-mobile are in fact able to compete on price as well. The two companies may be able to benefit from further economies of scale thus being able to drive their average unit cost of production down and charge less for their products. This again will go some way to tempting customers using rival firms to switch services which again will only benefit orange and T-mobile and could further increase their market share and boost the levels of profits seen by the company.
This overall suggests that the integration of the two businesses has made them more competitive. Integration could also benefit business competitiveness in that it is an extremely fast way for a business to grow. In many industries the ‘first mover advantage’ is crucial to any business that wants to capitalise on other areas of the industry that have not yet been exploited. If one firm manages to utilise the first mover advantage other firms may be left behind and so may struggle to compete in a certain area.
However if a firm was to buy out competition then they would have less of a problem trying to establish themselves in the area. Asda recently took over Netto for a figure of ?778mil. The move saw Asda instantly take over the 193 Netto stores across the UK many of which are small high street shops compared to the typical supermarket stores that Asda currently operates. The move will allow Asda to compete with other high street stores such as Tesco express and Sainsbury’s division of small high street stores. Without the takeover Asda would have found it incredibly difficult to establish themselves in this area of the industry.
However Asda now have bought into an number of stores that will be situated across the UK and will be able to compete with the likes of Tesco and Sainsbury’s. The takeover has also gained Asda a further 0. 7% share in the market which will further allow them to compete and put pressure on the market leaders Tesco. However if not carried out properly integration of two businesses can have a negative effect on businesses. Integration of two businesses may result in staffing problems as there will be a bring together of two workforces.
For example in the case of Indian firm Tata taking over Jaguar Land Rover in 2008 there was a cost cutting plan put into place in which 2000 employees of the company lost their job. Later as the recession hit the Indian firm closed the west midland factory and outsourced the production overseas. Such a reckless takeover and huge redundancy plan may have a negative effect on the rest of the workforce. Other employees may be in fear of losing their job which could have a direct link on the level of motivation in the staff that continue to work for the firm.
This in turn could then result in the quality of the final product that is being produced not being up to standard and therefore the customer may not be satisfied with the cars that are being produced. Customers may then decide to brand switch and buy the products of other rival companies and therefore Jaguar Land Rover will not be as competitive as a result of the takeover. Also the integration of businesses may result in the loss of USP which again could put them at a disadvantage to the competitors in the industry.
The USP of a company is the feature that distinguishes them from their rival firms; it is usually the thing that attracts customers to buy from them rather than competitors. In the case of the takeover of Cadbury by Kraft for ?10. 5bn in 2010 there was a lot of negative media attention as Cadbury’s was seen to be a British icon. Cadbury’s first opened in 1824 and has become a large part of British business history. Cadbury’s used this as a USP in order to attract customers to buy their products over their closest rivals.
However Kraft, being an American firm, taking over Cadburys and closing factories along with causing huge job losses has taken the sense of British ownership away from the business and therefore damaging the USP of Cabury’s to an extent. This therefore takes away a large chunk of Cadbury’s ability to differentiate themselves from rival competition and therefore damages their ability to compete and gain customers. This therefore will have a negative effect on the overall competitiveness of the business and the appeal of it in the eyes of the consumer.
Overall it would probably be considered that growth through the integration of two businesses will have a positive effect on the competitiveness of the businesses involved. Integration in the terms of merger and takeovers allow businesses to expand rapidly and gain greater market share making them a more powerful force in the market in a relatively short space of time. This can only put them at a greater advantage over their competitors and therefore more competitive. However integration needs to be managed and planned in a way that ensures the businesses maximises the benefits from it.
Job losses need to be planned to be kept to a minimum in order to avoid any sort of negative media attention which could damage the reputation and therefore make the integration of the two businesses less advantageous. Also the business being taken over in some cases needs to be thoroughly researched to identify any sort of USP or value that is important to the customer base, much like Cadbury’s. If the integration of the businesses may cause the loss of USP then good management and planning needs to be put in place to try and reserve it.