Management Notes

Reference Notes for Management

The type of diversification in which the company adds complementary to the existing product or service line is ______________.

The type of diversification in which the company adds complementary to the existing product or service line is ______________.

 Options:

A. conglomerate diversification.
B. horizontal integration.
C. vertical integration.
D. concentric integration.

The Correct Answer Is:

C. vertical integration.

Vertical integration is the type of diversification in which a company adds complementary products or services that are at different stages of the production or distribution process. This means that the company expands its operations either upstream (towards the source of raw materials or inputs) or downstream (towards the end consumer).

Lets examine the correct answer in detail:

C. Vertical Integration:

This strategy allows the company to have more control over its supply chain, reduce dependency on external suppliers or distributors, and potentially increase its competitive advantage.

In vertical integration, a company can engage in either backward integration or forward integration. Backward integration involves acquiring or establishing businesses that supply raw materials, components, or other inputs used in the production process.

This allows the company to have more control over the quality and availability of these inputs. As well as potentially reduce costs. Forward integration, on the other hand, involves acquiring or establishing businesses involved in the distribution or sale of the company’s products or services.

It can provide the company with direct access to end consumers. Allowing for better control over marketing, sales, and customer experience.

For example, a car manufacturer might engage in backward integration by acquiring a steel mill to ensure a stable and high-quality supply of steel for its cars. Conversely, the same car manufacturer might engage in forward integration by opening its own dealerships to directly sell its cars to consumers.

Now, let’s examine why the other options are not correct:

A. Conglomerate Diversification:

Conglomerate diversification involves a company entering new markets or industries that are unrelated to its existing business. This means that the new products or services offered have no direct connection or complementarity with the company’s current offerings.

For example, if a software company starts investing in real estate development, this would be considered conglomerate diversification. Therefore, option A is not correct in this context because it does not involve adding complementary products or services to the existing product line.

B. Horizontal Integration:

Horizontal integration involves a company acquiring or merging with other companies that operate in the same industry and at the same stage of the production or distribution process. This strategy aims to increase market share, reduce competition, and potentially achieve economies of scale.

For example, if a fast-food chain acquires another fast-food chain, this would be considered horizontal integration. It does not involve adding complementary products or services but rather focuses on expanding within the same industry. Therefore, option B is not correct in this context.

D. Concentric Integration:

Concentric integration, also known as related diversification, involves entering new markets or industries that are related to the company’s existing business.

However, in this type of diversification, the new products or services may not necessarily be at different stages of the production or distribution process. They are related in terms of technology, distribution channels, or customer base.

For example, a company that produces computer hardware may diversify into software development. While the products are related, they may not be complementary in the sense of being at different stages of the production or distribution process. Therefore, option D is not correct in this context.

In conclusion, vertical integration is the correct option in this case. It specifically involves adding complementary products or services at different stages of the production or distribution process.

This allows the company to have more control over its supply chain and potentially gain a competitive advantage. The other options (conglomerate diversification, horizontal integration, and concentric integration) do not fit this specific definition of diversification.

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