Foleo Company wishes to grow in size and operations. Two methods for achieving this goal have been proposed: linked diversification and vertical integration. First and foremost, a good understanding of what the two procedures mean is needed. Related diversification is the mechanism by which a company broadens its operation portfolio by venturing into product categories close to those it already offers (Palepu, 2009). As an example, a company that manufactures televisions may begin producing computers as a related diversification strategy. On the other hand, vertical integration refers to a process where a company broadens its scope of operations by offering services and or products at different steps on the same path of production (Balakrishnan, & Wernerfelt, 2013). The firm may do this by merging with or acquiring its distributor or supplier. This paper delves into the potential ethical implications of the two proposed expansion strategies on Foleo’s stakeholders in case they are adopted.
After related diversification, Foleo Company may, in the long run, gain a competitive edge over its rivals, particularly due to economies of scale. With time, a huge number of firms will leave the market, leaving the dominant firm to gain a significant market share. In such a situation, the company is bound to exploit clients by overpricing its products. Ethically, this does not auger well with the members of the public.
In a case related diversification is achieved through the acquisition of another firm, the management team of the company being acquired may not be willing to let go off their organization (Markides & Williamson, 2014). Thus, the entire process will be marred by coercions and lack of goodwill, something that is against business ethics. In case the situation is not contained, it might tarnish the name of Foleo and lead to a significant loss of its clientele base. The losses will be borne by all the stakeholders of the firm.
Lastly, related diversification is likely to cripple down the probability of fraudulent reporting at the enterprise. This applies in particular in cases where the company’s agenda is driven by greed and self-interest motives. This can be associated with the fact that related diversification does not create opportunities for financial innovations within the organization’s internal capital market. The managers focus more on enhancing means of sharing operations and competencies (Graham, Li, & Qiu, 2011). In the process, the idea of prudent financial management is lost, minimizing the chances of identifying frauds. This works to the detriment of all the stakeholders since apart from overpricing on the part of clients, the shareholders bear the burden of losses as a result of high production costs and weak sales.
Through vertical integration, Foleo is likely to be self-sufficient in that it can furnish itself with the raw materials required to produce its products. In such a case, it is possible to engage in business malpractices in a bid to gain maximum revenues from the manufacturing and selling process. For instance, the firm may decide to hoard raw materials, create artificial shortages, feign high cost of production and hike the final prices of goods that reach the final consumers.
Finally, Foleo Company is likely to be affected by the issue of unbalanced throughput since the different production processes require different scales of operation for efficiency. For the company to operate at relatively lower costs, it has to produce in bulk (Furrer, 2010). In case Foleo works on a small scale, it will be forced to compromise on the quality of the products that it manufactures to maintain the cost of production at manageable levels. This business malpractice is likely to reduce the utility gained by the customers from Foleo’s products.
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Furrer O (2010) Corporate Level Strategy: Theory and Applications, London: Routledge.
Graham, J. R., Li, S., & Qiu, J. (2011). Corporate misreporting and bank loan contracting. Journal of Financial Economics, 89(1), 44–61
Markides, C. C., & Williamson, P. J. (2014). Related diversification, core competencies and corporate performance. Strategic Management Journal, 15(S2), 149-165.
Palepu, K. (2009). Diversification strategy, profit performance, and the entropy measure. Strategic management journal, 6(3), 239-255.