Horizontal Integration: Single Industry Corporate Strategy

Horizontal integration
The process of acquiring or merging with
industry competitors to achieve the competitive advantages that
arise from a large size and scope of operations.

Acquisition
When a company uses its capital resources
to purchase another company.
Merger
An agreement between two companies to
pool their resources
and operations and
join together to better compete in a business or industry.

Lower Cost Structure Horizontal integration can lower a

company’s cost structure be- cause it creates increasing
economies of scale.

Increased Product Differentiation Horizontal integration may

also increase profitability when it increases product
differentiation, for example, by increasing the flow of
innovative new products that a company’s sales force can sell to
customers at premium prices.
Product bundling
Offering customers the opportunity to purchase
a range of products at a single combined price; this increases the value of a
company’s product line because customers often obtain a price discount when
purchasing a set
of products at one time, and customers become used to dealing with only one
company and its representatives.

Cross-selling
When a company
takes advantage of or “leverages” its established relationship
with customers by way of acquiring additional product lines or
categories that it can sell
to customers.
Leveraging a Competitive Advantage More Broadly For
firms that have resources or capabilities that could be valuably
deployed across multiple market segments or geo- graphies,
horizontal integration may offer opportunities to become more
profitable.

Reduced Industry Rivalry Horizontal integration can help to

reduce industry rivalry by acquiring or merging with a
competitor helps to eliminate excess capacity in an industry,

Increased Bargaining Power Finally, some companies use

horizontal integration be- cause it allows them to obtain
bargaining power over suppliers or buyers and increase their
profitability at the expense of suppliers or buyers.
 Problems with Horizontal Integration
Federal Trade Commission (FTC).

Antitrust Law

Vertical Integration: entering new Industries to Strengthen the

“Core” business Model
Facilitating Investments in Specialized Assets A specialized asset is one that is de- signed to perform a
specific task and whose value is significantly reduced in its next-best use. 2 The asset may be a piece of
equipment that has a firm-specific use or the knowhow or skills that a company or employees have
acquired through training and experience.

Holdup
When a company is taken advantage of by another company it does business with after it has made an
investment in expensive specialized assets to better meet
the needs of the other company.

Tapered integration
When a firm uses a mix of vertical integration and market transactions for a given input. For example, a
firm might operate limited semiconductor manufacturing itself, while also buying semiconductor chips on
the market. Doing so helps to prevent supplier holdup (because the firm can credibly commit to not
buying from external suppliers) and increases its ability to judge the quality and cost of purchased
supplies.
Enhancing Product Quality By entering industries at other stages of the value-added chain, a
company can often enhance the quality of the products in its core business and strengthen its
differentiation advantage.

Improved Scheduling Sometimes important strategic advantages can be obtained when vertical
integration makes it quicker, easier, and more cost-effective to plan, co- ordinate, and schedule the
transfer of a product, such as raw materials or component parts, between adjacent stages of the value-
added chain.
 Problems with Vertical Integration

(1) an increasing cost structure, (2) disadvantages that arise

when technology is changing fast, and (3) disadvantages that
arise when demand is unpredictable.

Alternatives to Vertical Integration: Cooperative relationships

Quasi integration

The use of long-term relationships, or investment into some of the activities normally
performed by suppliers or buyers, in place of full ownership of operations that are
backward or forward in the supply chain.
 Short-Term Contracts and Competitive Bidding

Strategic alliances
Long-term agreements between two or more companies to
jointly develop new products or processes that benefit all
companies that are a part of the agreement.

Building Long-Term Cooperative Relationships

Hostage taking
A means of exchanging valuable resources to guarantee that
each partner to an agreement will keep its side of the bargain.
Credible commitment
A believable promise or pledge to support the development of a
long- term relationship between companies.

Parallel sourcing policy

A policy in which a company enters into long-term contracts
with at least two suppliers for the same component to prevent
any problems of opportunism.
Strategic outsourcing
The decision to allow one or more of a company’s value-chain activities
to be performed by independent, specialist companies that focus all their skills and knowledge on just one kind of
activity to increase performance.
 Benefits of Outsourcing

Lower Cost Structure

Enhanced Differentiation

Focus on the Core Business

Risks of Outsourcing

Holdup
Increased Competition

Loss of Information and Forfeited Learning Opportunities