Introduction
Different firms in the world today are continually engaging in co-operative strategies through cooperation with other firms in partnership and strategic alliances rather than forming completion between them. They mainly engage in strategic alliances joint forces for a sustained competitive advantage and a mutually beneficial opportunity (Gulati, 1998). Two or more firms in the same or different industries but operating at the same production stage may merge to share resources at that same level as in the case of horizontal integration. This acquisition usually results to the creation of a monopoly (Lateral integration). In addition, a partnership may exist between the firm and its distributors or suppliers as in the case of vertical alliance. This action facilitates the exchange of commercial intelligence, know-how, and benefits the customers by lower prices. Moreover, firms may decide to engage into a co-operate level like franchising, where they share a single brand name. These firms have the freedom to use the parent company’s trademarks and strategies to achieve their goals. Of all the corporate-level corporate strategies, vertical strategic alliance seems to be the most successful.
Vertical Integration Strategy
This strategy allows a firm to operate at various levels of the distribution channels. These channels usually begin with the manufacturer who sells products to wholesalers, who sell to the retailers, and finally to the end users. Each member in the supply chain produces different products and services, which then combine to satisfy a common need. A good example is the merger of Ticketmaster and Live Nation that manage and represent artists and sell event tickets.
How vertical Integration Strategy can help achieve co-operate strategy goals.
- Lowers costs by eliminating market transaction costs
Although firms ‘managerial costs rise as they become larger and more complex, this integration much avoids costs associated with enforcing contracts, middlemen and, transportation. Eliminating middlemen and selling directly to end buyers removes unnecessary steps of markups along the way. Opportunistic behavior is one of the main sources of transaction costs, where a firm may take advantage of another when circumstances permit. Asymmetric information is another common source of these costs. It is a situation when one firm has more information about the business and transactions involved than the other firm (Arrow, 1963). It is through firm integration that these costs are eliminated.
- Synergy and Competitive Advantage
The main goal for any firm is to have a competitive advantage over other firms operating in the same industry. Vertical integration strategy can help block competitors from gaining access to important markets or scarce resources (Soares, 2007). For example, a retailer may decide to buy a manufacturing company to gain access to patents, proprietary technology, and resources available only in that local area. The firm may also gain a lot of knowledge and expertise, which it can utilize not only in the joint venture project, but in other projects and proposes.
- Expanding Market Power
Many firms have increased their monopoly profits by monopolizing or price discrimination through integrating vertically. An upstream monopoly who supplies a key input for a downstream competitive market can much boost his profit through forward integration to monopolize the production industry. In addition, a vertically integrated firm may be able to restrict inputs to potential competitors.
The advantage that vertical integration has over others
Vertical integration strategy has higher success rates than others. Although this strategy is governed under contracts, trust between partners makes this strategy more effective. In a strategy like horizontal integration, management is more difficult since partners involved are often competitors.
Conclusion
Firms continue to engage in co-operative strategies through forming strategic alliances with other firms to attain their objectives. The aim is for partners to leverage off each other’s strength, making competition more effective and bringing synergy into the activities that would prove impossible if one firm tries alone. Some of the strategies include vertical integration, franchising, and horizontal integration. Some of the co-operate strategy goals that a firm can achieve through integrating vertically include synergy, gaining competitive advantage and expanding market power. The firm may also lower its cost since this strategy eliminates market transaction costs. The trust between partners in this cooperative strategy makes it have higher success rates than others.
Reference
Arrow, K. J. (1963). Uncertainty and the Welfare Economics of Medical Care. American Economic Review, 53 (5), 941–973.
Gulati, R. (1998). Alliance and Networks. Strategic Management Journal, 19, 293-317.
Soares, B. (2007). The use of strategic alliances as an instrument for rapid growth, by New Zealand based quested companies. United New Zealand School of Business Dissertations and Theses.
