The discipline of microeconomics focuses on firm relationships with outside environmental factors such as suppliers, competitors, regulators, and customers (Stengel, 2012). While in the past businesspersons had the assumption that enterprises exuded the attribute of measuring costs related to various exchange patterns among environmental factors, the implementation of actual production processes was not perceived as an economic factor within organizations. As such, these issues surfaced on facets such as organizational design and organizational behavior in order to motivate the human resource aspect of an enterprise much like a retail store. Onwards, recent developments in organizational economics have resulted in economic precepts that bring about a better understanding of internal firm activities. A good example of understanding organizational economics is the process of diversification, that is, which goods and services should a company provide (Stengel, 2012). Moreover, related topics of interest such as production activity needed and the purchase of raw materials from other firms or contracted from other businesses encompass organizational economics. This paper discusses organizational economics with a bearing on Apple and Samsung’s unrelated diversification, backward (upstream) and forward (downstream) vertical integration, and their resultant major differences and similarities.
There are numerous reasons to expand an enterprise to new horizons both on the production and consumption perspectives. Most enterprises have diversified product and services portfolio, which continually alter over time and depending on the needs of the market. There are several reasons for the instigation of change and these factors usually lead to pertinent decisions to either increase the company’s product portfolio or suspend its production. Some of the motivations for expanding an enterprise’s product portfolio include a consideration of cost and production; the structure of the market and firm competition; the nature of products produced, whether final goods or intermediate; and considerable uncertainties of future revenues, profits, and costs required by firms to properly implement pertinent resources. In terms of value chains, numerous businesses sell products intended to aid the running of operations in other businesses. Such a scenario in business is referred to as sequence production and may involve a number of firms. Primarily, participant firms in the process of sequence production can typically trace intermediate goods backward.
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Depending on which strategy a company chooses for business, there are two types of diversification: related and unrelated diversification. First, diversification analysis needs to properly and adequately demonstrate, and resultantly support that the strategies employed for diversification will have a return on investment that compensates for both cost and risks. Related diversification refers to the process by which a company diversifies through the expansion of existing product lines or markets. Apple and Samsung are good examples of related diversification with the former flourishing from its rich ecosystem of products and services. In fact, Apple’s strategy has come to be referred to as a Quantum Strategy alluding to the illogical and naturally impossible behavior of atoms and electrons on a quantum level (Schutte, 2015). In terms of design and innovation, Apple incrementally augments its portfolio of product improvements, which translates to related diversification. Such augmentations are evident in progressive products such as the iPhone and Mac Book, among others. Samsung too displays related diversification through products such as the Samsung Galaxy range of smartphones.
Unrelated diversification refers to the scenario in which a business adds novel products that are unrelated to the core objective of the company. While Apple has not been entirely keen on unrelated diversification, Samsung has made its product portfolio immensely diverse. Starting out as a mobile phone company, Samsung produced majorly produced phones up until it diversified to other electronics such as refrigerators, television sets, memory and hard drives for sale to clients such as Sony, HTC, and Nokia, among other components. Moreover, in 1992, the company also commenced commercial vehicle manufacturing (Jeong, 2004). Such unrelated diversifications within Samsung have catapulted the company forward in terms of profits and overall standing within the market. In addition, while Apple primarily focuses on the development of smart electronics, while it started, its product portfolio entailed computers and phones. Presently, besides its hardware presence, the company also sells and delivers applications and digital content through avenues such as iTunes, the App Store, the television APP store, and Apple Music among others ("Apple Inc (AAPL.O)", 2018). Such selling of third party software is an unrelated diversification at Apple.
To comprehend vertical integration, consider the example of ice cream, whereby, at the ice cream parlor, the vendor might have bought the ice cream from a distributor who obtained it from a company. Now, the company being the originator created the ice cream by using materials such as milk and water among others. Such is a value chain and it affects business economics profoundly. Moreover, the milk came from farmers, which might be another business of supplying factories with fresh milk. This further translates to cow keeping and the dynamics involved in breeding superb milk producers. As such, each production operation contributing to the creation of the final product adds value to the resources required for the completion of each stage. Therefore, since network operations contributing to the final product are quantifiable through stages, the entire network is known as the value chain of the product. As such, the expansion of business entails the relationship of newly integrated activities to activities engaged within the firm prior to the integration process. When the new activity integrated into the process is within the same stage of the value chain or a similar value chain, such company expansions are often horizontal integration. On the other hand, while the new activity is within the same value chain but at a divergent stage, the expansion is termed as vertical integration. A conglomerate merger represents a new activity that is part of a different chain combined with the new entity.
According to business scholars, the competitive nature of business enterprises within the smartphone industry has the characterization of it being determined by the scope of influence within the value chain. Compared to Samsung, Apple has the most profound vertical integration strategies within the smartphone industry. It uses backward vertical integration to obtain higher profit margins. Primarily, Apple produces its own iOS along with other applications, which it prices for both software and content download. Such a strategy is decidedly divergent from companies such as Samsung, Nokia, Motorola, and Wiko among others, which depend on the Android system from Google. On the other hand, it also employs forward integration since it sources its supplies for making hardware from other companies. Moreover, Apple also outsources the workforce required to make its devices. Samsung displays immense forward vertical integration. By definition, forward integration involves a type of vertical integration whereby there is an expansion of business activities to control the direct supply of company products. As such, Samsung cuts off wholesalers to sell directly to retailers who then sell the product to customers. In terms of backward vertical integration, Samsung is far ahead compared to Apple on the hardware side since it has its own factories, which build the smartphones.
Integration and diversification are quite significant among enterprises. Moreover, ventures of peripheral smartphone applications and devices often expand the involvement of small businesses within the industry’s supply chain. In such occurrences, businesses often distribute applications after the design and manufacture phase that are used alongside smartphones. Here, good examples are both Apple and Samsung, which have accepted the vertical integration concept. The design and production of peripheral devices such as digital pens, printers, smart card readers, digital watches, and the combination of smartphones with medical devices among others result in an advancement of vertical integration within the smartphone industry. Moreover, aside from innovation and development, repairs and maintenance also influence the value chain and depending on the approach of a company, it can either be backward or forward vertical integration.
Company strategies are at the core of proper business operations and eventual profitability. Strategy often entails organizational economics and primarily focus on concepts such as diversity and integration. They can be potent in the realization of business success. Often, strategies encompass concentration strategies and vertical integration strategies, which when amalgamated and attuned to company objectives form potent success courses over time (Ketchon &Short, 2012). In terms of diversification, Apple’s Quantum Strategy is by far the epitome of success within the smartphone industry. The use of this approach, particularly one focused on related diversification has secured this smartphone giant the future in terms of market share. On the other hand, Samsung shows immense future promise with its unrelated diversification since it produces various electronic products that are still viable within the market.
Conclusively, organizational economics remains the lifeline of most enterprises. This makes corporate-level strategies highly significant, thereby; executives have to decide not only the industry to operate efficiently, but also the firms that will compete with it. Integration expands the value chain to novel stages. While backward integration enters the business of suppliers, forward integration enters the business of customers. Ultimately, diversification expands enterprises through entering into new industries that are different from it. While corporate strategy can also entail company shrinkage through approaches such as retrenchment, diversification and integration ultimately propel a company to its pinnacle.
References
Apple Inc (AAPL.O). (2018). Retrieved from https://www.reuters.com/finance/stocks/companyProfile/AAPL.O
Ketchon, D. & Short, J. (2012). Chapter 8: Selecting corporate-level strategies . Strategic Management: Evaluation and Execution. Flat World Education. https://saylordotorg.github.io/text_mastering-strategic-management/s12-selecting-corporate-level-stra.html
Schutte, S. (2015). The secret sauce behind Apple’s success. Retrieved from https://realbusiness.co.uk/tech-and-innovation/2015/01/28/the-secret-sauce-behind-apples-success/
Stengel, D. (2012). Economics of Organization . Managerial Economics Principles . Flat World Education http://saylordotorg.github.io/text_principles-of-managerial-economics/s05-economics-of-organization.html
Jeong, S. (2004). The Chaebol’s Diversification: Ssangyong and Samsung. Crisis And Restructuring In East Asia , 198-214. doi: 10.1057/9780230510982_9
