Business Concept Carlson Companies - Case Study Example

Hospitality Sales and Marketing Hospitality Sales and Marketing Introduction As one of the largest hotel and travel companies in the world, Carlson Companies is ideal for case studies in various business concepts. One of the firm’s most prominent successes is its vertical integration strategy. The company engages in both upstream and downstream vertical integration, relying on an adaptable corporate strategy that can be manipulated to suit acquisition and expansion in different markets. This paper will examine the dynamics of Carlson’s vertical integration and how they affect its goals and objectives. Part 1 Task 1: Literature Review According to Chathoth (2014), product development is at the core of corporate growth and success. Since it is a vital component of marketing, product development determines whether or not a business succeeds in its industry. In this context, the term product development incorporates services, hence its application to service-based industries. Since the beginning of the 20th century, firms have become increasingly reliant on the superiority of their products to gain and maintain competitive advantage. Lee (2013) argues that the importance of the product is evident in theoretical and practical knowledge, typified by the notion that the product precedes all other requirements for starting a business. The product is also considered by many scholars to be the most important of all Ps (Cunill, 2012). It, therefore, follows that product development is a fundamental aspect of business growth. This leads to one of the most common business practices and a major source of competitive advantage: integration. When companies integrate, they do so to encourage expansion and domination in a specific industry. There are two types of integration that can be used by any company to give a company greater more presence in any market: horizontal and vertical integration (Evans, Campbell & Stonehouse, 2012). This literature review will lean towards the latter as it is relevant to the subject. According to Fazlollahi, Franke & Ullberg (2012), historically, firms used vertical integration to influence access to limited resources. In the contemporary business setting, companies are disintegrated both internally and externally, and they engage in numerous joint ventures and strategic alliances as part of their growth strategies (Lahiri & Narayanan, 2013). It has even become common for corporations to outsource even those processes that are usually viewed as key. Some of the best examples of vertical integration can be found in the oil sector. In the 70s and 80s, numerous firms were involved in the prospecting and extraction of crude oil to lock out downstream supply chains and refineries (Shukalovych, 2014). For example, companies like British Petroleum (BP) and Shell gained control over every process involved in delivering a drop of oil from their underground reserves to gas stations and car fuel tanks. Dell Computers developed the vertical integration concept by combining the conventional vertical integration of the distribution network with the unique aspects of the virtual corporation to spawn what is now known as virtual integration (Lawrence & Weber, 2013). For example, the company assembles computers using other manufacturers’ components but maintains relationships with companies that are more sustainable than the traditional buyer-supplier association. Dell does not own those firms in the style of the typical vertically integrated company; it relies on information exchanges and several loose links that achieve a similar objective “a tightly coordinated supply chain” (Maleki & Cruz-Machado, 2013) Vertical integration is normally difficult for most companies to adopt successfully. For example, it is often costly and hard to reverse. Once a firm implements vertical integration, it finds itself constrained to making the strategy effective or seeing it fail. According to Loertscher & Reisinger (2014), switching to horizontal integration or avoiding integration altogether is something that only very large companies can afford to do. Even then, the expenses involved are too prohibitive to justify. According to Carlock (2014), upstream businesses tend to integrate with downstream suppliers to control an industry for the output. Although this is suitable when market forces are favourable, it becomes unsustainable when demand reduces (Barat & Kulkarni, 2012). In such cases, companies are forced to lower their prices by large margins to downstream suppliers so that they can maintain intended levels of capacity utilisation. Such upheavals can be seen in the manner in which Apple dethroned some of the most vertically integrated technology firms in the world (Duhaime, Stimpert & Chesley, 2012). Apple developed a system of autonomous specialists that manufactured computers much more efficiently than rivals like IBM. Part 2 Task 2: Analysis of the case in relation to the elements of the product development that have been used by Carlson Companies This case has shown that Carlson Companies has successfully exploited elements of product development to further its corporate objectives. Carlson focuses its product development efforts to three subareas of product development: revolutionary product development, product development diversification, and product modification (Nocco, 2012). These three strategies are designed to adapt the company to different market conditions and remain sustainable. Product development diversification has helped the company to thrive in markets that are already saturated with similar products or too many competitors (Shukalovych, 2014). Using this approach, Carlson has been able to avoid the adverse effects created by declining or stagnant profits and revenues in saturated markets (Day, 2014). For example, in the United States, where the competition is intense and products are virtually similar, the company has been forced to employ product diversification to not only survive but also succeed. This is why Carlson has maintained a firm grip on the US hospitality and travel industry, from which it generates a large percentage of its revenues. In most cases, a majority of people often think that growth is the most important aspect of a business, but this is not practically true. In some cases (e.g., saturated markets) the smartest companies usually focus on maintaining their positions rather investing in growth strategies that are more regressive and overambitious than stable and realistic (Cunill, 2012). Market forces vary from one country to another, and factors like saturation are not always permanent. In this instance, it is better to focus on stability and develop anticipative strategies that will be implemented when the market becomes more dynamic instead of approaching the situation like a new entrant (Cunill, 2012). In this regard, Carlson has managed to outperform its rivals. The effectiveness of the product diversification strategy, as applies to Carlson, was evident in the aftermath of the 2007 global financial meltdown, when the company posted financial results that defied market conditions and expectations. However, the enterprise also has an advantage in its flexible approach to diversification (Evans, Campbell & Stonehouse, 2012). Although it is inclined to aim for stability, it does not hesitate to develop new products to “break the ice” in new markets as a way of countering the slow growth in others. Carlson has used diversification to project itself beyond its current product portfolio and create new products targeting emerging markets. For example, while it has always been known for its hospitality and travel product segments, the organisation has not hesitated to partner with businesses outside its industries to develop products and services that generate more awareness on its main offerings and help it maintain relevance (Evans, Campbell & Stonehouse, 2012). In this case, the partnership or the product may not be groundbreaking, especially if it has been tried by other firms. However, it is still new to Carlson and, as a result, qualifies as a diversification strategy. Carlson also uses a product modification strategy that has enabled it to penetrate foreign markets. Through this approach, the company has attracted new customers in current and existing markets. For example, Carlson has developed different holiday, travel and hotel packages that are essentially offshoots of its primary offerings and proceeded to market them as independent products (Lahiri & Narayanan, 2013). As a result, it has gained more recognition among customers from a wide range of social classes and created revenue streams where none previously existed. This is part of the company’s “something for everyone” approach, which is aimed at attracting as many customers as possible (Lahiri & Narayanan, 2013). Since Carlson cannot develop entirely new products as frequently as some customers may expect, it has opted to modify existing products and market them to current and prospective clients in different regions. In the United Kingdom, for example, the company, through Thomas Cook, develops a wide range of packages from a limited number of core product and service segments (Nocco, 2012). The last product development strategy used by Carlson is the revolutionary method. Unlike the first two, which involve spawning affiliate products from established ones, this approach entails creating a novel product for which prior need is yet to be identified. In the technology industry, this may include products like portable computers and mobile phones. However, in the hospitality and travel industries, where Carlson is based, the company has created unique new products that have changed industry dynamics (Kotler, Bowen & Makens, 2010). In this regard, the business has, over the years, introduced unprecedented products that have given it more visibility in the industries in which it operates and allowed it to penetrate more foreign markets. Carlson has benefitted from creating a balance between new and existing products. According to Buckley (2014), Carlson’s vertical integration model has been successful because the company has followed the recommended blueprint for creating and implementing the strategy. Also, unlike other companies in the same sectors, Carlson’s profile suits vertical integration. For example, the company has implemented limited changes to practice the approach. Its size, corporate strategy, and objectives have allowed it to become vertically integrated more rapidly and efficiently than its rivals and even businesses in other industries (Evans, Campbell & Stonehouse, 2012). Additionally, Carlson has successfully aligned its objective to its vertical integration policy. When adopting the strategy, the organisation identified marketing power as one of its main goals as a vertically integrated business (Lahiri & Narayanan, 2013). After that, it conducted minor restructuring to successfully merge its national and international objectives with the proposed vertical integration; this reduced the obstacles encountered in the early stages of implementation. Carlson has been effective in exploring “up” and “down” opportunities in its supply chain and then exploiting them using its vertically integrated business model. As a result, the company has nurtured stability and developed a clear understanding of the dynamics of its industry vis-à-vis vertical integration. Once it had established the vertical chain of processes in its markets, the company pursued growth opportunities in all directions (Kotler, Bowen & Makens, 2010). It ventured upstream and downstream and took advantage of market forces that competitors were yet to identify. In this regard, the firm can be regarded as a “corporate shark” that can move up and down its “food chain” more conveniently than other “predators.” Finally, Carlson frequently reviews the benefits of its vertical integration against the risks before deciding whether a product needs to be vertically integrated (Nocco, 2012). All decisions are informed by comprehensive market research and knowledge. Task 3: Will Carlson Companies be able to maintain a competitive advantage based on "product development" if other companies match the offering? Carlson Companies can maintain a competitive advantage based on “product development” in the event that other companies match the offering. It is important to note that Carlson is an industry leader as well as one of the most experienced players in the market. The company’s market leadership is built on decades of innovation and flexibility that cannot be erased through rivals’ matching of its product development function (Nocco, 2012). Carlson also has a stable and powerful support system that ensures that its product development efforts can be sustained against any competition. One of the most important aspects of this support system is its financial capability (Lahiri & Narayanan, 2013). The company has enough financial resources to counter attempts to eat into its market share using any strategy, and frequently demonstrates this through its marketing campaigns. However, it would be overly dismissive to ignore the threat posed by Carlson’s rivals because of the increasingly dynamic nature of the hotel and travel industry. In this respect, the longevity the company has enjoyed is also one of its weaknesses. As enterprises grow bigger, the threats of monotony and rigidity loom larger over time. Since its industry is service-based, it is easier for new entrants to develop incentives that directly rival Carlson’s services (Kotler, Bowen & Makens, 2010). This caveat is only meant to show that although the company appears to have huge advantages over its competitors, the likelihood of being overtaken is remote but not nonexistent. As the hotel and travel industries become more volatile, Carlson will have to redefine its product development strategy to accommodate new technologies and innovations. Also, since technology has become more available, smaller businesses can now take on larger rivals like Carlson by creating and marketing impactful innovations in local and foreign markets (Evans, Campbell & Stonehouse, 2012). Two decades ago, large corporations completely dominated small and midsized companies in terms of capacity to acquire and use technology. In the 21st century, innovation and technology have become liberal and easier to replicate (Evans, Campbell & Stonehouse, 2012). For example, with the emergence of apps focused on the hotel and travel markets, ambitious entrepreneurs can now create their own niche markets that enable them to gain market share at the expense of larger, more established companies (Cunill, 2012). This means that Carlson must channel more investment towards human resource and product development. It must embrace change by hiring younger and more talented individuals who can improve its dynamism. The firm should also look at what other companies are doing in the same industry and other sectors, draw valuable lessons from those examples, and develop better policies to maintain its current dominance. Task 4: Literature Review versus the reality experienced at Carlson Companies Inc. In the modern economy, a corporation’s net profit is no longer sufficient. While the theoretical dimension places emphasis on doing things right, the practical aspect leans towards doing the right things. Sustainable and balanced growth is what a majority of companies aspire to. However, it is also the biggest challenge for most managers (Kotler, Bowen & Makens, 2010). Since the chief executive officer’s role is gravitating towards managing growth, value creation has become the ultimate objective. Vertical integration is the best way to achieve sustainable growth and, while it is challenging, it is still one of the most vital strategic decisions that a company can make (Nocco, 2012). One problem evident in the theoretical approach and that is almost nonexistent in the practical view, is the disparity between the performances of companies practicing vertical integration. In the theoretical approach, the general assumption is that there should be a degree of uniformity in the results of firms that have adopted the strategy. This contrast, however, is hardly surprising; it has been observed in many other concepts. In theory, it is recommended that companies use information technology, globalisation and take advantage of knowledge economies to make vertical integration successful (Spender, 2014). However, in practice, stiffer competition and different approaches to the application of technology inevitably lead to variations in results. For example, when it comes to globalisation, firms that are prepared to take advantage of its pluses derive more benefits from its existence. Such preparation involves developing effective policies and strategies in the areas of human resource development and technology (Nocco, 2012). Companies that are not well set up for the impacts of globalisation will gain little from its conceptual advantages. In this regard, there are other circumstantial forces created by the external environment that contribute to differences in the implementation of vertical integration (Nocco, 2012). These include political, regulatory, economic changes that are, more often than not, unprecedented. Effective vertical integration is best achieved with stable organisational structures. More efficient, dynamic and lucrative strategies are also required for successful vertical integration; this creates more value for stockholders. The benefits of vertical integration manifest in two forms: financial cooperation and operational synergy. Financial synergies are focused on debt thresholds, investment of cash surpluses and taxation (Luo, 2013). On the other hand, operational synergies affect the expansion and operating profit of a business. In some instances, they also lead to higher forecasted cash flows. In some cases, financial synergies also result in lower discount rates and higher cash flows. Successful vertical integration is a crucial catalyst of value creation and a major driver of growth (Kotler, Bowen & Makens, 2010). In summary, it is safe to say that the practical and theoretical aspects of all business concepts display varying degrees of contrasts in organisational performance; vertical integration is just one of the many. Future research should focus on bridging the gap between the conceptual and practical dimensions of vertical integration but, ultimately, the current chasm comes down to differences in management strategies (Cunill, 2012). In a company setting, individual mistakes by senior leadership manifest organisationally, yet little can be done to standardise management. Conclusion This paper has demonstrated why and how Carlson Companies has been so successful in implementing vertical integration. The concepts and attributes discussed show, first and foremost, why there is a disparity between the theoretical and practical aspects of vertical integration and product development. 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