Diversification and vertical integration strategies

When you have finished your research, write a four- to five-page paper answering the
following questions. Make sure to cite both the required background readings as well as
articles on Samsung and Apple:

1.

  1. To what extent does Apple engage in related diversification? To what extent do they
    engage in unrelated diversification?
  2. To what extent does Samsung engage in related diversification? To what extent do they
    engage in unrelated diversification?
  3. To what extent does Apple engage in backward (upstream) vertical integration? To what
    extent do they engage in forward (downstream) vertical integration?
  4. To what extent does Samsung engage in backward (upstream) vertical integration? To
    what extent do they engage in forward (downstream) vertical integration?
  5. Overall what major differences or similarities do you find between Samsung and Apple’s
    diversification and vertical integration strategies?

530 case 4 – Diversification and vertical integration strategies

Apple Inc.

Apple Inc. is a well-known company whose performance only a few select firms can
rival. Among the key advantages that allow for such impressive performance is the
diversification undertaken by the firm (McCullum, 2017) . While the firm has received criticism
for having a huge dependence on the iPhone, the firm has some additional products, software,

530 – CASE 4 – DIVERSIFICATION AND VERTICAL INTEGRATION2
and services. This section looks into the diversification and integration strategies adopted by
Apple Inc.
The extent of diversification
Apple has shown a reasonable range of diversification. The various products, services, and
software the firm offers props its revenue and creates a sense of stability and aversion of some
levels of risk. It engages in both related and unrelated diversification as outlined below.
Related Diversification. Related diversification refers to the movement of a firm into a
new industry that has similar characteristics to the current industry (Ketchon & Short, 2012) .
Apple Inc., originally named Apple Computers Inc., was in the computing industry. Over the
years, as part of its diversification strategy, they expanded into the cell phone industry through
the iPhone, which has since taken over as their anchor product. The company has also diversified
and improved the original computers to include iPads and newer iMacs.
Unrelated Diversification. Unrelated diversification refers to the entry of a firm into an
industry where there are minimal to no important similarities to its industry (Ketchon & Short,
2012) . Apple Inc., which initially operated in the computing industry, has many strategies to
diversify into unrelated industries. These include the music industry through their iTunes
platform where, in cooperation with various music retailers, studios and independent artists they
sell music to over 100 million customers, beating former leader Walmart (Johnson, Li, Phan,
Singer, & Trinh, 2012) . Apple has also diversified into Internet television and payment services
through Apple TV and Apple Pay. These three are unrelated to the computing industry and,
therefore, fall under unrelated diversification.

The extent of vertical integration

530 – CASE 4 – DIVERSIFICATION AND VERTICAL INTEGRATION3
Vertical integration is a form of business expansion, where the company expands into a different
stage in the value chain. This type of expansion may be forward, or backward along the value
chain (Strangel, 2012) . This section looks into the extent in which Apple Inc. has engaged in
backward integration as well as forward vertical integration.
Backward (upstream) vertical integration. Backward vertical integration involves the
expansion of the firm to an earlier stage of the production process (Holden, 2011) . Apple Inc.,
since the early days, knew the economic and business importance of controlling raw materials.
As such, the company integrated backward and started building their hardware components for
their computers (Harrigan, 1986, p. 539) . This has been a tradition brought into the modern
production of all its hardware in its current lineup.
Forward (downstream) vertical integration. Forward vertical integration refers to the
expansion of a company to include later stages of the value chain (Holden, 2011) . Apple has
engaged in forwarding vertical integration by eliminating the need for distribution merchants and
retailers. Apple Inc. uses its branded stores with their staff as the points of sale for their
merchandise across the globe.

Samsung Electronics Co., Ltd

Samsung has built a reputation as an important component to Apple Inc. over the years.
This is largely a because of better product diversification strategy, that has led the firm to leading
and controlling of a wider market (Eassa, 2013) . This section outlines the extent of
diversification and vertical integration by Samsung.
The extent of diversification

530 – CASE 4 – DIVERSIFICATION AND VERTICAL INTEGRATION4
Samsung Electronics Co., Ltd has grown from a low-cost equipment manufacturer in Japan to a
globally recognizable and accepted brand (Khanna, Song, & Lee, 2011) . This rise is mainly
attributable to the extent of diversification adopted over the years by Samsung.
Related Diversification. Samsung has engaged in related diversification through their
expansion from a parts manufacturer to the building of complete devices and equipment. The
firm started by building parts such as motherboards, screens, diodes, and semiconductors. Today,
however, the firm has expanded to the building of phones, televisions, set-top boxes, tablets,
kitchen appliances, and an array of other devices (Wang, Ketchen, & Bergh, 2012, pp. 367 –
369) .
Unrelated Diversification. Samsung has engaged in unrelated diversification by
expanding into other industries with little in common with their original industry. Such industries
include renewable energy, healthcare (Jung-a, 2011) , financial services, shipbuilding, chemicals,
and IT services (Khanna, Song, & Lee, 2011) . While some of these have not been performing as
forecasted, the strategic plan to expand by Samsung is evident.

Vertical Integration
Samsung is a global pinnacle in technology and an example of the success of vertical integration
within a company’s business model. The firm has engaged in both backward and forward
vertical integration as outlined below.
Backward (upstream) vertical integration. Samsung has gone through backward
integration sometimes in its history. Among the most iconic of these is the realization of the need
to produce all components of their devices once they went into global production (Kim, 1997,
pp. 5, 27) . This decision in 1969 proved very profitable for the firm and increased control over

530 – CASE 4 – DIVERSIFICATION AND VERTICAL INTEGRATION5
their competitors. As such, Samsung has continued to produce their components, and even
supply to their competitors such as Apple Inc.
Forward (downstream) vertical integration. Downstream vertical integration was
among the first strategic moves Samsung made when it went into global production. Also, over
the years, the firm has engaged in forwarding vertical integration by adding final user products
such as televisions, microwaves, and mobile phones, whose components they already
manufactured. This enabled Samsung to draw closer to the consumers and acquire the ability to
respond faster to their needs (Holden, 2011) .

Comparison of strategies adopted by Apple and Samsung

Regarding related diversification, Apple Inc. diversifies into products and services that
closely relate to their current products. On the other hand, while still focusing on electronics and
parts, the industries served by Samsung are far much wider. The same trend is observed in the
separate diversification section, where the new products by Apple Inc. are closely knit into their
ecosystem. Samsung delves much farther into chemicals and healthcare, which have completely
no integration with the original industry.
While Apple Inc. began with forwarding vertical integration, Samsung began with
backward vertical integration. However, as the companies grew, they both expanded upstream
and downstream over the years. A major similarity between them is that both businesses have
sufficient strategies, where they have related and unrelated diversification, as well as forward and
backward vertical integration.

530 – CASE 4 – DIVERSIFICATION AND VERTICAL INTEGRATION6

Reference List

Eassa, A. (2013, November 7). Samsung Is Apple’s Worst Nightmare.
Harrigan, K. R. (1986). Matching vertical integration strategies to competitive conditions.
Strategic Management Journal, 535 – 555.
Holden, P. (2011). Business integration – vertical, horizontal and conglomerate. St. Lawrence
College.
Apple, Inc. Marshall Digital Scholar.
Jung-a, S. (2011, November 28). Samsung diversification going awry. Retrieved from Financial
Times
& J. Short, Strategic Management: Evaluation and Execution. New York: Flat World
Education.
Khanna, T., Song, J., & Lee, K. (2011, August). The Globe: The Paradox of Samsung’s Rise.
Harvard Business Review. Retrieved from https://hbr.org/2011/07/the-globe-the-paradox-
of-samsungs-rise
Kim, Y. (1997). Technological Capabilities and Samsung Electronics’ International Production
Network in Asia. Berkeley: Berkeley Roundtable on the International Economy – UC
Berkeley.
McCullum, N. (2017, May 20). Apple Inc. (AAPL) Should Address Diversification Concerns to
Shore Up AAA Credit Rating. Retrieved from Smarter Analyst:

530 – CASE 4 – DIVERSIFICATION AND VERTICAL INTEGRATION7

Strangel, D. (2012). Chapter 5: Economics of Organization. In D. Strangel, Managerial
Economics Principles. New York: Flat World Education.
Wang, C. L., Ketchen, D. J., & Bergh, D. D. (Eds.). (2012). West

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