Value Chain - Acquisitions and Merger

Value Chain - Acquisitions and Merger

The value chain was introduced by Michael S. Porter in 1985 in the book "Competitive Advantage". 

In our video on Porter's Value Chain, you can see the full explanation of Porter's Value Chain. Here we have an addition to the model and then we go to the value chain based on acquisitions and mergers. 

The value chain's primary activities can be divided into two:

Upstream

With upstream, the company can assess how their production works in the best possible way and which raw materials must be purchased. There may also be considerations as to whether production should possibly be moved to another country - also known as outsourcing 

Downstream 

Here, the company must consider how it will get its products onto the market. 

Downstream consists of:

Parts of Outbound Logistics
Marketing and sales
Service
About the model - Acquisitions and mergers

Acquisitions and mergers are strategic business decisions that have a significant impact on a company's value chain.

When a company completes an acquisition or merger, it can affect the value chain in several ways.

Vertical integration

Happens when a company acquires or merges with a company at another level in the value chain. 

Vertical integration can be done Upstream – also called backward integration.

Backward integration can be done by the company acquiring a supplier.

By acquiring suppliers, a company can reduce the number of suppliers and thus reduce the complexity of the supply chain.

Vertical integration Downsteam – also called forward integration.

This can, for example, happen when a company buys out its middleman or skips them and sets up an online store.

Horizontal integration 

Happens when a company acquires or merges with a competitor. This can increase market share, reduce competition and create economies of scale.

Merger

When two companies merge, a number of synergies can arise.

Economic synergies

Savings achieved through reduced costs, such as joint procurement, shared facilities or elimination of redundant (duplicate) functions.

Technological synergies

Sharing technology and innovation that can lead to the development of new products or improved processes.

Geographic expansion

Acquisitions and mergers can provide access to new geographic markets and thus expand the company's customer base

Product diversification: Adding new product lines can reduce dependence on single markets or products.

Mergers and acquisitions – increased bargaining power vis-à-vis suppliers

A larger company may have greater bargaining power vis-à-vis suppliers, which may result in better purchasing conditions.

Criticism of the model

Michael Porter's value chain analysis is a central model in strategic management and is used to understand and optimize companies' internal activities to achieve competitive advantage. But as with all theories and models, there are both advantages and disadvantages to Porter's value chain. Here are some key points of criticism.

Simplifying reality:

Porter's value chain may be too simple and static to capture the complexity and dynamics of modern businesses. In reality, activities are often more intertwined and not as clearly separated as the model suggests.

Lack of flexibility

The model assumes that companies' value chains are linear and sequential, which is not necessarily the case in reality. Many companies work in networks and ecosystems where activities are more interactive and dependent on external partners.

Ignoring technological advances

Technological innovations and digitalization have changed the way companies operate. Porter's model was developed in the 1980s and does not fully consider the digital transformation that many companies are undergoing today.

Despite these criticisms, Porter's value chain is still a useful tool for many companies to analyze and improve their internal processes. However, it is important to supplement this model with other tools and perspectives to gain a more comprehensive understanding of the company's strategic position and potential.