CASE Solution: The rise of WorldCom
Q1. What was the rational for WorldCom pursuing a strategy of horizontal integration?
Rationale for WorldCom perusing a strategy of Horizontal integration
1) Speed- WorldCom use acquisition is one of the most time-efficient growth strategies. It reaps the opportunity to quickly acquire resources and core competencies not currently held by this company, usually with a recognized brand or positive reputation, and existing client base.
2. Market power- Through acquisition, WorldCom quickly built its market presence via increasing market share while reducing the competition’s stronghold. Where competition has been particularly challenging, growth through acquisition reduced competitor capacity and level the playing field. Market synergies are achieved.
3. New resources and competencies- WorldCom chose acquisition as a route for gaining resources and competencies currently not held. These can have multiple advantages, ranging from immediate increases in revenues to improving long term financial outlook to making it easier to raise capital for other growth strategies.
4. Meeting stakeholder expectation- As being no 2 long distance telephone service provider, WorldCom's pressure to perform and meet expectations for returns, yield results more quickly than other means for growth lead this horizontal integration
5. Financial gain.- Synergy between the surviving and acquired organizations can mean substantial cost savings as well as more efficient use of resources for soft financial gains.
6. Reduced entry barriers. Acquiring an existing entity can often overcome formerly challenging market entry barriers while reducing risks of adverse competitive reactions. Market entry can otherwise be a costly proposition, involving market research among other upfront expenses, and take years to build a significant client base.
Q.2- Why did the strategy fail?
Reason for Strategic Failure-
Factor 1: Ineffective leadership and a passive, dominated board of directors.
Factor 2: Aggressive growth strategy (e.g. via acquisition), or over ambitious investments, funded by easy credit and overvalued stock.
Factor 3: Accounting Misstatements- WorldCom made major accounting misstatements that hid the increasingly perilous financial condition of the company.
Factor 4: Misalignments at the organizational level from duplication of processes leading to inefficiency, while downsizing leads to the loss of talented people
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Factor 5: Further misalignments at organization level, i.e. the culture becomes unproductive and inward looking, and core competencies weaken. These are exacerbated within an unforgiving environment (e.g. industry hit by an external shock like the 2007-08 financial crash).
Factor 6: Strategy and core competencies are not aligned with the requirements of the competitive environment, leading to failure.
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