Integrative and diversification growth in business


A business’s sales and profits may be increased through backward, forward, or horizontal integration within its industry. For example, drug company giant Merck has gone beyond just developing and selling ethical pharmaceuticals. It purchased Madco, a mail-order pharmaceutical distributor in 1993, formed a joint venture with DuPont to establish more basic research, and another joint venture with Johnson & Johnson to bring some of its ethical products into the over-the-counter market.

Media companies have long reaped the benefits of integrative growth. Here is how one business writer explains the potential that NBC could reap from its merger with Vivendi Universal Entertainment to become NBC Universal. Admittedly a far-fetched example, it gets across the possibilities inherent in this growth strategy.

[When] the hit movie Sea biscuit (produced by universal Pictures) comes to television, it would air on Bravo (owned by NBC) or USA Network (owned by Universal) , followed by the inevitable bid to make the movie into a TV series (by Universal Television Group), with the pilot being picked up by NBC, which passes on the show, but it’s then received in the “Brilliant But Canceled� series on cable channel Trio (owned by universal) where its cult status leads to a Spanish version shown on Telemundo (owned by NBC) and the creation of a popular amusement-park attraction at Universal Studios.

How might Musicale achieve integrative growth? The company might acquire one or more of its suppliers (such as plastic material producers) to gain more control or generate more profit (backward integration). It might acquire some wholesalers or retailers, especially if they are highly profitable (forward integration). Finally, Musicale might acquire one or more competitors, provided that the government does not bar this move (horizontal integration). However, these new sources may still not deliver the desired sales volume. In that case, the company must consider diversification.

Diversification Growth

Diversification growth makes sense when good opportunities can be found outside the present businesses. A good opportunity is one in which the industry is highly attractive and the company has the right mix of business strengths to be successful. For example, from its origins as an animated film producer, Walt Disney Company has moved into licensing characters for merchandized goods, entering the broadcast industry with its own Disney Channel as well as ABC and ESPN acquisitions, and developed theme parks and vacation and resort properties.

Several types of diversification are possible. First, the company could seek new products that have technological or marketing synergies with existing products lines, even though the new products themselves may appeal to a different group of customers (concentric strategy). It might start a laser disk manufacturing operation because it knows how to manufacture compact disks. Second, the company might search for new products that could appeal to current customers even though the new products are technologically unrelated to its current product line (horizontal strategy).