Horizontal Integration

12 Key excerpts on "Horizontal Integration"

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  Strategic Management

  Theory & Cases: An Integrated Approach

  • Charles Hill, Melissa Schilling, Gareth Jones(Authors)
  • 2019(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Horizontal Integration often significantly improves the competitive advantage and profitability of companies whose managers choose to stay within one industry and focus on managing its competitive position to keep the company at the value creation frontier. 9-3a Benefits of Horizontal Integration In pursuing Horizontal Integration, managers invest their company’s capital resources to purchase the assets of industry competitors to increase the profitability of its single-business model. Profitability increases when Horizontal Integration (1) lowers the cost structure, (2) increases product differentiation, (3) leverages a competitive advantage more broadly, (4) reduces rivalry within the industry, and (5) increases bargaining power over suppliers and buyers. Lower Cost Structure Horizontal Integration can lower a company’s cost structure because it creates increasing economies of scale . Suppose five major competitors e op-erate a manufacturing plant in some region of the United States, but none of the plants operate at full capacity. If one competitor buys another and closes that plant, it can operate its own plant at full capacity and reduce its manufacturing costs. Achiev-ing economies of scale is very important in industries that have a high-fixed-cost struc-ture. In such industries, large-scale production allows companies to spread their fixed costs over a large volume, and in this way drive down average unit costs. In the tele-communications industry, for example, the fixed costs of building advanced 4G and LTE broadband networks that offer tremendous increases in speed are enormous, and to make such an investment profitable requires a large volume of customers. Thus, AT&T and Verizon purchased other telecommunications companies to ac-quire their customers, increase their customer base, increase utilization rates, and reduce the cost of servicing each customer.

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  Managerial Economics

  Problem-Solving in a Digital World

  • Nick Wilkinson(Author)
  • 2022(Publication Date)
  • Cambridge University Press

    (Publisher)

  The suppliers there- fore vertically integrated with their bottlers in order to make the necessary investments, and, having done this, spun them off again. Some 30 years on there has been another shake-up in the industry, reflecting increasing health awareness and a widespread desire by consumers to 542 11 Positioning and Growth Strategy reduce sugar intake. Thus, they are switching from carbonated drinks to bottled water, teas and sport beverages. This challenge has, again, led suppliers to reintegrate with bottlers in order to make the necessary large-scale investments, such as in producing new containers and modifying distribution networks. The case study on autonomous vehicles illustrates many of the important issues described in this section, in particular the nature and effects of uncertainty created by technological change. 11.5 Horizontal Integration 11.5.1 Nature of Horizontal Integration This occurs when two firms in the same market, at the same level of the production process, are consolidated into a single enterprise. This will automatically increase the market share of the joint firm. The integration process can occur either through merger or acquisition. Although these terms are often used interchangeably, there can be a difference between them: mergers are said to occur when two (or more) firms are voluntarily combined under common ownership, while acquisitions occur when the assets of a firm are bought without the agreement of the controllers or managers of the target firm. Such acquisitions are sometimes referred to as hostile takeovers. In a hostile takeover, the management of the target firm may recommend to its share- holders that they not sell their shares, even at a premium to the current share price. If the management is successful in persuading the shareholders not to sell, the takeover bid will fail, but, if shareholders do agree to sell, the takeover will take place, often with the existing managers losing their jobs.

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  The Growth Strategies of Hotel Chains

  Best Business Practices by Leading Companies

  • Kaye Sung Chon, Onofre Martorel Cunill, Onofre Martorell Cunill(Authors)
  • 2006(Publication Date)
  • Routledge

    (Publisher)

  Chapter 5 Horizontal Integration

  The Theory

  Horizontal Integration takes place when several companies, all involved in the same level of the production chain, join forces to achieve a greater degree of concentration in a particular industry. Company owners integrate in this way to increase their purchasing power in relation to their suppliers and to increase their control of the distribution and sales of their product in the marketplace (monopoly power). An extreme case of Horizontal Integration occurred in the mid-1970s, when the countries that produce and export cooking oil formed a cartel to raise the price of oil by multiplying its original price four times.

  Authors who specialize in Horizontal Integration do not believe that all companies have one optimum size (although factories or exploitation activities, such as mines or farming operations, may). Nevertheless, they accept that certain effects can reduce average costs when either production or the scope of a company’s business operations increases. In other words, they believe in economies of scale. When these effects raise the average costs, it is referred to as diseconomies of scale.

  In this sense, discussions have been held on a series of positive or negative effects of factors on a company’s size and growth. These factors have led to several different theories on how economies of scale are created. The now classic work by Robinson (1957) is an interesting basis for an examination of these effects. Robinson classifies these factors into technical, management-based, financial, sales-related, and risk-based factors.

  Technical Factors

  Technical factors partly determine a company’s size. However, to what extent they determine its size and whether they operate in the same way and have the same interrelations as other factors do should be ascertained.

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  Corporate Level Strategy

  Theory and Applications

  • Olivier Furrer(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  Chapter 10 Vertical Integration Coordinating the Value Chain

  DOI: 10.4324/9781315855578-10

  Vertical integration refers to the corporate level strategy by which a firm diversifies its activities along the industry value chain, whether by producing its own input (i.e., backward, or upstream, integration) or disposing of its own outputs (i.e., forward, or downstream, integration) (Grant, 2013 ; Harrigan, 1984 , 1985a ). Vertical integration increases a firm’s value added margins for a specific processing chain (Harrigan, 1985a) (see Figure 10.1 ) and thereby enjoys scale or integration economies, as well as greater control over sources of raw material or distribution outlets (Pfeffer & Salancik, 1978 ; Scherer & Ross, 1990 ).

  Figure 10.1 Stages in the industry value chain

  Vertical integration, as a corporate level strategy, is often one of the first diversification strategies that firms embrace (Harrigan, 1984 ). Vertical integration can be assimilated to a corporate level strategy because it refers to the scope of a firm when it chooses to compete in particular value-adding stages of an industry value chain (Hofer & Schendel, 1978 ). Yet vertical integration also constitutes an internalization strategy (Williamson, 1975 ), in transaction cost theory terms, because the firm performs activities itself instead of relying on external suppliers or buyers.

  One of the famous examples of a fully vertically integrated firm is the Carnegie Steel Company during the late 1880s. At the height of its growth, the firm controlled not only the mills that manufactured the steel but also the mines from which the iron ore was extracted, the coal mines that supplied the coal, the ships that transported the iron ore to the factory, the railroads that transported the coal, the coke ovens that cooked the coal, and so on, along the entire value chain (Livesay, 1999

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  Maximizing Corporate Value through Mergers and Acquisitions

  A Strategic Growth Guide

  • Patrick A. Gaughan(Author)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  One of the benefits of being vertically integrated is that it can lower some of the risks a company faces in the marketplace. Buying a supplier can allow a company to have greater certainty in access to supplies. It may also allow these supplies to be more dependably available at more predictable prices. When getting access to key supplies is a major risk factor, companies may be able to lower this risk through vertical integration. By acquiring a supplier, they may be able to get a dependable source of inputs while possibly being able to gain a competitive advantage by preventing these supplies from being available to the competition. This competitive advantage may carry with it antitrust ramifications, but as markets have become increasingly globalized, most deals, especially vertical ones, tend to move through the antitrust approval process without a great deal of opposition.

  VERTICAL INTEGRATION AS A PATH TO GLOBAL GROWTH

  When a company manufactures a product, it obviously has to get that product to its ultimate consumers. Even if a company has superior products, if competitors have the distribution channels locked up, the company may be at an insurmountable disadvantage. Sometimes, M&A can be the solution to this dilemma.

  Many industries have different layers or stages with some being more competitive than others. For example, the petroleum industry has multiple stages from exploration and extraction to transportation and refining to the retail stage. Some stages are more profitable than others. We discuss later in this chapter how U.S. companies reacted to the changing profitability in the refining business to become less vertically integrated and to sell off their refining businesses. However, for other industries, being vertically integrated is a way of making sure that your products have a clear path to the consumer and that you will not be adversely affected by the actions of competitors. Companies may want to try to control as many outlets for their products as possible to ensure that they can maintain prices that allow them to extract maximum economic rents for their products. Often, such efforts are thwarted by regulators. One prominent example of how this was done in the United States, but also in the global, market without attracting resistance from antitrust regulators was that of eyeglass manufacturer and marketer Luxottica. We discuss this company's very successful use of a vertical integration strategy in the case study that follows.

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  Strategic Management

  The Challenge of Creating Value

  • Peter FitzRoy, James M. Hulbert, Timothy O'Shannassy(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  When considering this vertical industry system, the firm must decide whether or not to expand its scope into immediately adjoining stages. This is normally referred to as vertical integration, and we now turn our attention to these decisions.

  Vertical integration

  The objective of vertical integration is to achieve higher profitability through the elimination of the customer or supplier, bringing their margins under the firm’s control. Backward integration requires new operational skills; forward integration requires new marketing skills, at the same time creating competition with existing customers (Harrigan, 1983).

  Vertical integration is motivated by the idea that the business can create additional value when more activities share common ownership. So where do these advantages come from? One source may be joint production economies – there are efficiency gains from linking two activities together.

  Integration may also provide protection against asset specificity, where the business can be held to ransom by a monopoly supplier or customer. In these cases of market failure, the firm probably has no choice but to vertically integrate, as has occurred in some resource-based industries such as aluminium. In many food products, however, the market for raw materials is more competitive, and few food processors have vertically integrated backwards into agriculture.

  There are several issues with vertical integration as a business strategy. Vertical integration inevitably results in an increasing proportion of a firm’s or business’s assets being in one industry, thus increasing dependency on it. In the car industry, for example, if we currently make cars and acquire a tyre producer, we have not diversified in terms of industry; we have even more assets in the car industry, increasing exposure to changes in industry demand. Such actions may be taken defensively, to protect our original investment, although this may be dangerous, throwing good money after bad.

  It may also be difficult to balance scale and capacity (Díez-Vial, 2007). We can see this by using a hypothetical but realistic example from the car industry. Suppose the efficient size of plant for cars is 400,000 units per year, requiring two million tyres per year. Let us further assume that the car firm builds an efficient-sized tyre plant that produces three million tyres per year. The question then is: What do we do with the extra one million tyres per year? Do we attempt to sell them to our competitors and will they purchase from a competitor? Or will we sell the extra product to the aftermarket for replacement tyres? If so, we will need a strong retail marketing group. If neither of these alternatives seems feasible, the tyre plant will produce only two million tyres per year. If there are strong economies of scale, the plant will be a high-cost facility, making the cost of tyres to the car company uncompetitive. This example reinforces that an integration decision must be well thought out before choosing it as a course of action.

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  Strategic Supply Chain Management

  • Carlos Cordón, Kim Sundtoft Hald, Ralf W. Seifert(Authors)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  2.1 Effect on profitability of sales increase vs. supply chain improvement

  Base

  10% sales increase

  10% supply chain improvement

  Sales ($) 100 110 100 Supply chain costs ($) 70 77 63 SG&A ($) 20 20 20 Profit ($) 10 13 17

  Vertically and horizontally integrated supply chains

  The level of vertical integration is the degree of integration up and down a supply chain. For example, if a retailer starts manufacturing the products it sells, it is increasing its level of vertical integration. Vertical integration may be upstream or downstream. The interesting question is, how many consecutive steps in the supply chain should the company control and own? Two extremes are the Ford Motor Company in the 1920s and Lacoste today. Ford was known in the early 20th century for owning all of the supply chain tasks, from managing the plantations that produced rubber for the tires, to tire making, car assembly and delivery. By contrast, Lacoste is an almost fully outsourced company: manufacturing and distribution are entirely outsourced, while marketing and design are largely outsourced.

  The level of Horizontal Integration is the breadth of activities at the same point in the supply chain. A typical method of increasing the level of Horizontal Integration is to acquire other companies or brands in the same business. For example, supermarkets that are moving toward selling a larger variety of non-food items are increasing their level of Horizontal Integration. Another example is Volkswagen’s efforts to merge with Porsche: by merging with another brand in the same field, Volkswagen was able to consolidate its activities and thereby achieve economies of scale.

  Although in the last century we have seen many companies pursue a much lower level of vertical integration, this evolution does not mean that companies must strive for vertical disintegration. If anything, today there are extremely successful corporations like Inditex (the owner of the Zara fashion chain) and Luxottica (the world leader in eyewear) that have a high level of vertical integration, but there are also thriving companies like Hewlett-Packard that have a very low level of vertical integration. Thus, it cannot be said that a high or low level of vertical integration on its own is the key to success. The main advantages and drivers of vertical integration of supply chain flows are:

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  Foundations of Strategy

  • Robert M. Grant, Judith J. Jordan, Phil Walsh(Authors)
  • 2015(Publication Date)
  • Wiley

    (Publisher)

  VERTICAL INTEGRATION Defining Vertical Integration Vertical integration is the extent to which a firm owns vertically related activities. The greater a firm’s ownership extends over successive stages of the value chain for its prod- uct, the greater its degree of vertical integration. The extent of vertical integration is indi- cated by the ratio of a firm’s value added to its sales revenue: the more a firm makes rather than buys, the lower are its costs of bought-in goods and services relative to its final sales revenue. Vertical integration can be either backward, where the firm acquires ownership and control over the production of its own inputs, or forward, where the firm acquires own- ership and control of activities previously undertaken by its customers. Vertical integration may be full or partial. Some Canadian wineries (typically the smaller ones) are fully integrated: they produce wine only from the grapes they grow and sell it all directly to final customers. Most are partially integrated: their homegrown grapes are supplemented with purchased grapes and they sell some wine through their own tasting rooms, with distributors taking the rest. The Benefits and Costs of Vertical Integration Strategies toward vertical integration have been subject to shifting fashions. For most of the twentieth century, the prevailing wisdom was that vertical integration was generally beneficial because it allowed superior coordination and reduced risk. During the past 30 years there has been a profound change of opinion: outsourcing, it is claimed, enhances flexibility and allows firms to focus on their “core competencies.” Moreover, many of the coordination benefits traditionally associated with vertical integration can be achieved through collaboration between vertically related companies. However, as in other areas of management, fashion is fickle.

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  Starting and Running a Business All-in-One For Dummies, UK Edition

  • Colin Barrow(Author)
  • 2016(Publication Date)
  • For Dummies

    (Publisher)

  Exactly where does your company stand in terms of vertical integration in your own industry? The question’s important, because it affects your decision about whether to become more or less vertically integrated over time. Several terms have been coined by business gurus to describe the strategic moves that you may decide to make:

  • Backward integration: Backward integration means extending your business activities in a direction that gets you closer to the raw materials, resources and expertise that go into creating and producing your company’s products.
  • Forward integration: Forward integration means extending your business activities in a direction that gets you closer to the marketplace by involving the company in packaging, marketing, distribution and customer sales.
  • Outsourcing: Outsourcing means concentrating on your core business activities by farming out other parts of your company’s operations to outside contractors and vendors that specialise in those particular areas.
  • Divesting: Divesting means reducing your company’s activities to focus on specific aspects of your business by spinning off or selling other pieces of the company.

  Tables 1-2 and 1-3 describe some of the pros and cons of vertical integration.

  TABLE 1-2 Pros of Vertical Integration

  Pro	Reason
  Efficiencies	If you’re in charge, it’s sometimes easier to co-ordinate activities at the various business stages along the way, combining related functions or getting rid of overlapping areas to streamline your overall operations.
  Resources	If you have a hand in the upstream (early-stage) activities of a business, you can guarantee that your company has access to the raw materials and resources that it needs to stay in business.

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  Contemporary Strategy Analysis

  • Robert M. Grant(Author)
  • 2021(Publication Date)
  • Wiley

    (Publisher)

  D. Chandler, Strategy and Structure (Cambridge: MIT Press, 1962). 238 PART IV CORPORATE STRATEGY the relative efficiencies of firms relative to markets. For most of the 19th and 20th cen- turies, new technologies—including innovations in management and organization— have favored large firms. Around the mid-1970s, this trend went into reverse: a more turbulent business environment and new information and communications technol- ogies favored more focused enterprises coordinated through markets. Yet, during the 21st century, a new phase of global consolidation has seen the traditional benefits of scale and market dominance reasserting themselves. The Benefits and Costs of Vertical Integration So far, we have considered the overall scope of the firm. Let us focus now on just one dimension of corporate scope: vertical integration. The question we seek to answer is this: Is it better to be vertically integrated or vertically specialized? With regard to a specific activity, this translates into: To make or to buy? First, we must be clear what we mean by vertical integration. Vertical integration is a firm’s ownership and control of multiple vertical stages in the supply of a product. The extent of a firm’s vertical integration is indicated by the number of stages of the industry’s value chain that it spans, and can be measured by the ratio of its value added to sales revenue. 4 Vertical integration can be either backward (or “upstream”) into its suppliers’ activ- ities or forward (or “downstream”) into its customers’ activities. Vertical integration may also be full or partial. Some California wineries are fully integrated: they produce wine only from the grapes they grow, and sell it all through direct distribution. Most are partially integrated: their homegrown grapes are supplemented with purchased grapes; they sell some wine through their own tasting rooms but most through independent distributors.

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  21st Century Management: A Reference Handbook

  • Charles Wankel, Charles B. Wankel(Authors)
  • 2007(Publication Date)
  • SAGE Publications, Inc

    (Publisher)

  For example, a low-com-plexity product with low margins designed and manufac-tured by a company with high infrastructure costs may be outsourced. Comparatively, a highly complex product with high margins and high infrastructure costs may have value added by a strategy that attracts services from a customer, thereby adding further value to itself. Hayes, Wheelwright, and Clark (1988) stated that the most important step in developing and pursuing an integra-tion strategy is to identify the capabilities that are required to support the firm’s desired competitive advantage. In for-mulating its strategy, a firm must position itself along two key dimensions—one relating to products and the other to production processes. This approach assigns dimensions to decision making along one axis only—horizontal. Hill took this theory further by pointing out the impor-tance of process positioning, which considers the width of a firm’s internal span of process, the degree and direc-tion of vertical-integration alternatives, and its links and relationships with suppliers, distributors, and customers. The introduction of directional vertical integration and the incorporation of customers and distributors are in line with the concept of the horizontal axis having a relationship with both the upstream and downstream vertical axis. Lehtinen (1999) pointed out that the literature on process positioning had until this point concentrated on the prob-lems of make or buy decisions (upstream vertical), largely ignoring the managerial questions, which followed from the changes in a firm’s span of process (product range). He further pointed out that changes in the span of process would invariably lead to a change in the total management task within a business and that changes to span of process would bring corresponding changes in the task of manufac-turing management (infrastructure). This further reiterated the relationship between the vertical and horizontal axes.

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  Post-Merger Management

  Value Creation in M&A Integration Projects

  • Kirsten Meynerts-Stiller, Christoph Rohloff(Authors)
  • 2019(Publication Date)
  • Emerald Publishing Limited

    (Publisher)
• So-called horizontal mergers, which take place within one and the same market, are basically aimed at expanding and consolidating market share by acquiring additional segments. In this case, there is a risk of too much overlap between the market and customer segments. In conjunction with the differing distribution structures and customer profiles, this can result in failure to achieve the anticipated turnover synergies.
• The purpose of vertical mergers is to exploit the potential synergies along the value creation chain by optimizing costs and turnover on the supplier or distribution side. Here too it is important to bear in mind that oversimplified business case assumptions do not reflect the true complexity of most deals: buying up a supplier, for example, can bring about a change in the supplier market as a whole. Owing to the reduced number of sellers, the resulting price trend may be less favourable than before the purchase.
• In the case of lateral or conglomerate mergers, the aim is to tap into previously unrelated technologies, products, customer segments and markets by means of an innovative business model, to switch to a different business field or to spread entrepreneurial risk. This carries a significant risk of failure, as the acquiring company generally has little experience of the new business model, and it may be necessary not only to integrate but to found a completely new company.

11.3 Organizational Amalgamation

Deciding on the type of organizational amalgamation, including its breadth and depth, is a complex process influenced by numerous factors that contribute significantly to the success of the merger. The underlying train of thought is based upon questions of synergy realization, controllability of organizations or the degree of cooperation required between certain departments.
The extent of organizational integration required correlates with the intended strategic interdependence between the merging companies or business units (Haspeslagh & Jemison, 1991). Based on the acquisition goals, a distinction can be drawn between the following four fields depending on the need for organizational autonomy and strategic interdependence (Fig. 11.3