Vertical Integration

The first strategic change that an organization sometimes makes is to vertically integrate within its industry. The organization can move backward to prior stages to guarantee sources of supply and secure bargaining leverage on vendors; or it can move forward to guarantee markets and volume for capital investments, and became its own customer to feed back data for new products. Each company can have its center of gravity at a different stage.

However, this initial strategic move does not change the center of gravity, because the prior and subsequent stages are usually operated for the benefit of the center of gravity stage. Research findings indicate that the poorest performer of the strategic categories is the vertically integrated by-product seller (Rumelt 1974). These companies are all upstream, row material, and primary manufacturers. Their resource allocation was within a single business, not across multiple products. Significant here is their inability to change, because the management skills-partly technological know-how does not transfer across industries at the primary manufacturing center of gravity.

Diversification

The next strategic change that a company usually takes is diversification. There are different types of diversification.

By-Product Diversification. One of the first diversification moves that are vertically integrated company makes is to sell by-products from points along the industry chain. But the company has changed neither its industry nor its center of gravity. A key dimension that distinguishes among companies pursuing this strategy is the number of industries into which by-products are sold.

Related Diversification. Related Diversification is a strategic change in which the company moves its core industry into other industries that are related to the core industry. The position taken here is that relatedness has two dimensions: 1. one is the degree to which the new industry is related to the core industry; 2. the other - more important - is the degree to which the company operates at the same center of gravity in the new industry.

Related diversification is a strategic change in which the company diversifies be entering new industry but always enters business in that industry at the same center of gravity. An appreciation for the degree of relatedness is needed to estimate the amount of strategic change that is being attempted. A scale of relatedness could be constructed by listing the functional aspects of any business, such as process technology, product technology, product development, purchasing, assembly, packing, shipping, inventory management, quality, labor relations, distribution, selling, promotion, advertising, consumer / customer, buying habits, working capital, and credit.

The magnitude of strategy implementation problem is directly proportional to the amount of relatedness in the diversification move. The less related the diversification, the greater the difficulty of strategy implementation, and the greater the likelihood of acquisition versus internal growth.

Intermediate diversification. Between related and unrelated diversifiers are a large number of firms whose businesses are somewhat related but operate at a number of centers of gravity. The strategic change hypothesized is to be more difficult because it involves managing businesses with different centers of gravity. The company must learn not only new businesses but also new ways of doing business.

Unrelated Diversification. The unrelated company has several centers of gravity, operate in many industries, and actually seek to avoid relatedness (e.g., electronic, energy). However, the intermediate and unrelated diversification does not change the centers of gravity of their core business.