Q.

1)

Horizontal Integration

 Pros
o Increased market share
o Larger consumer base
o Increased revenue
o Reduced competition
o Synergistic efforts (combined marketing efforts, technology, etc.)
o Create economies of scales and economies of scope
o Reduce production costs
 Cons
o High level of scrutiny from government agencies
o Creation of a monopoly
o Higher prices for consumers
o Less options for consumers
o Reduced flexibility for the new, larger company
o Lack of alignment between company values destroys overall company value

Q.2)

Vertical Integration:

 Vertical integration is when a company owns or controls its suppliers, distributors, or retail locations
to control its value or supply chain.
 Vertical integration benefits companies by allowing them to control the processes, reduce costs and
improve efficiencies.
 Backward integration is when a company expands backward on the production path into
manufacturing.
 Forward integration is when companies control the direct distribution or supply of their products.

Cons

 The biggest disadvantage of vertical integration is the expense. American Apparel must invest a great
deal of capital to set up or buy factories. They must then keep the plants running to maintain
efficiency and profit margins.

 Vertical integration reduces a company's flexibility by forcing them to follow trends in the segments
they integrated. Suppose American Apparel acquired a retailer for their product and created an outlet
store that carried the old merchandise as well. That retailer's competition began using a new
technology which boosted their sales. American Apparel would now need to acquire that technology
to stay relevant in that market.
  Another problem is the loss of focus. Running a successful retail business, for example, requires a
different set of skills than a profitable factory. It's difficult to find a management team that's good at
both. Integration can cause management to focus less on their core competencies, and more on the
newly acquired assets.

 Culture class is an issue. It's also not likely that American Apparel will have a culture that supports
both retail stores and factories. A successful retailer attracts marketing and sales types. This type of
culture isn't responsive to the needs of factories and the clash can lead to misunderstandings,
conflict, and lost productivity.

Q.3)

Why Diversification?

 When their objectives can no longer be met by merely expanding within their existing product
market.
 Because the retained cash exceeds the investment demand for more expansion.
 If there are greater profit opportunities than in its present product market.
 Firms may explore diversification possibilities if the information available does not permit a conclusive
comparison between expansion and diversification.
 Firms diversify to avoid dependence on one product line, to achieve greater stability of profits, to
make greater use of an existing distribution system and to acquire know how.
 Firms’ diversity because it helps them avoid the danger of over specialization, helps in balancing the
vulnerabilities due to one’s own wrong size. Further, the firm’s technology research and development
may also help in finding our products which appear to have promise.

A proposed diversification move should pass three tests or it should be rejected (Porter, 1987).

 How attractive is the industry that a firm is considering entering? Unless the industry has strong profit
potential, entering it may be very risky.
 How much will it cost to enter the industry? Executives need to be sure that their firm can recoup the
expenses that it absorbs in order to diversify.
 Will the new unit and the firm be better off? Unless one side or the other gains a competitive
advantage, diversification should be avoided.