International Paper (IP) is a company in the forestry products industry. Since its launch in 1898, the company did not experience any growth through the 1900s (Parnell, 2017). In an effort to expand its business, the company decided to adopt a related diversification plan. This approach involved the acquisition of several firms such as Hammermill Paper and Federal Paper among several others in the 1980s and 1990s and progressed further to acquire companies such as Shorewood Packaging into the 2000s (Parnell, 2017). Furthermore, the company also made significant changes in its investments and workforce. Notably, IP became engaged in less divestment of unrelated businesses. This strategy is evidenced by the several times in which the company trimmed its workforce and sold its assets. Today, IP is identified as one of the leading companies in the forestry products industry (Parnell, 2017).
Businesses, especially the smaller ones that are focused on experiencing growth tend to use acquisitions, which can either involve related diversification or unrelated diversification. In the case of International Paper (IP), we can see that the decision to venture into related diversification was an effective decision due to various aspects (Parnell, 2017). The most noticeable positive aspect of this approach is that it provided IP with an easier expansion (Duhaime, Stimpert & Chesley, 2012). The company was quite aware of the kind of business it was venturing into. This means that by focusing on acquiring related businesses, it was able to easily succeed and implement the same strategies rather than venturing into new businesses that it was not aware of.
Furthermore, I believe the decision to engage in related diversification and divest in less related businesses was an effective strategy since it helped the company to reap a competitive advantage. The organization was able to benefit from the transfer of skills since all the workers under its premises worked in related fields (Griffin, 2012). The business venture also allowed the company to have a variety of related businesses under one roof, which enabled it to provide more services without having to include other companies or seek assistance from other business. The competitive advantage of divesting in less related business also lowers the associated costs (Griffin, 2012). For instance, I believe that the company was able to save on the costs it would have incurred through several activities that are involved in venturing in other businesses such as training costs, outsourcing, and hiring of new skilled personnel among several others.
Finally, related diversification was an effective strategy, which is evidenced by the success gained by IP in the current era. Notably, related diversification allows a firm to achieve consolidated performance, which yields more positive outcomes compared to when the business operated individually (Duhaime, Stimpert & Chesley, 2012). This means that the company is able to control almost all processes involved in the manufacturing of paper from the growing of trees to the actual sale of the finished product. Based on the identified points, I believe that the decision to divest in an unrelated business and venture into related business was effective.
In the forestry products industry, economies of scale can both be viewed as an essential and non-essential aspect. The significance of economies of scale can be viewed in light of the benefits that an organization is able to acquire in the process. For instance, a company like IP is more likely to incur less cost in the production of paper related products due to operational synergies as well as efficiencies (Lamberg, 2012). Another benefit associated with such an approach is that a company is more likely to increase the competitive advantage of companies in this industry.
Nevertheless, the forestry products industry deals in raw materials that can be considered to be sensitive. Notably, the application of economies of scale in such an industry means that one should increase the production level in order to experience cost advantages (Lamberg, 2012). The industry deals with the use of trees in the production of various products. In the current era, most countries have become aware of the negative effects of cutting down trees including the most serious consequence, which is global warming (Lamberg, 2012). From this perspective, cutting down of more trees for the purpose of increasing production of related products cannot be viewed as an effective strategy.
We are currently aware of the importance of protecting the environment from more harm. The society understands that growing more trees and protecting forests is one major approach to maintaining a safe environment (Hansen, Panwar & Vlosky, 2017). However, this knowledge can bring about problems to the forestry products industry. Evidently, companies in this industry are more likely to be subjected to more regulations and limitations on the number of trees that they can cut within a given period (Hansen, Panwar & Vlosky, 2017). This limitation is more likely to affect IP in the future since the availability of raw materials will be reduced. In effect, the company would be forced to increase its price margins and look for alternative sources of revenue.