Under the horizontal integration involved company either expands to a comparable type of production activities or increases the contemporary quantity of production operations. Taking the example of a firm that makes radio sets at the assembly stage, it that firms buy another maker of radio sets that is horizontal integration. Usually, this strategy is used to strengthen the position of a company in the industry. When deciding on the competitor to acquire the first step is checking to ensure that they are on the same production stage with your business. This is to say there is no possible way in which a company in the assembling stage can make a merger with a firm in the marketing stage.
Horizontal integration is intended to increase product differentiation, develop the size of the company, open doors for new markets, reduce the level of competition and increase merchandise differentiation. Therefore when choosing a competitor to acquire it should be one with whom such privileges are guaranteed. The merger should be a company that has some experience in the industry and is flexible regarding changes or losses that might be incurred in the production process (Saylor Academy). Another thing to look for when deciding on the best competitor to acquire is what strategic resources they have at their disposal. For instance getting a company with a valuable brand name is a smart move that assures you a more extensive market will now be accessible. When horizontal integration is pursued by many firms, it can lead to the formation of a monopoly or oligopoly. Such market structures enjoy quite a variety of advantages that cannot be attained in the other types of markets. Due to this fact, HI is the best long-run plan for a business especially if it is successful.
Vertical integration is an approach that can be opted for in a situation whereby a company’s buyers or suppliers have too much say over the company affairs and are earning enormous returns at the firm’s expense. By joining the supplier’s sector, the management is now in a better position to get rid of the influence that supplier had over the company or at least reduces it to a reasonable amount. It is therefore crucial for a business to be integrated vertically when executives notice that other participants in the market have more leverage over the business activities (Kokemuller). This approach is also called for when there is need to improve the accessibility to a primary raw material at the expense of competitors who will then have to pay a bit dearly for it.
A business should engage in both backward and forward vertical integration. By being involved in the backward VI, a firm can enlarge its advantages over rivals and even hinder them from accessing scarce resources. Having control over the supply of resources makes it difficult for many competitors to be in the market as it will require a lot of managerial and financial resources which some firms cannot afford. On the other hand, forward vertical integration is essential as it gives a company more access to the retail channels and the distribution process. The importance of this is that it enables a business to differentiate itself from rivals via efficient marketing. Moreover, it is easier for a retailer to adopt the changes of customers need if he (retailer) owns the company that produces the goods in the subject. Therefore customer’s satisfaction is delivered, and this makes them prefer this particular company over all the others in the industry that are creating similar merchandise
When a business is participating in various value chains that are not similar such a strategy is referred to as conglomerate. The approach is more attractive by how an enterprise can diversify to survive difficult times in one industry by being present in other types of markets. When a company decides to use the diversification strategy, it ventures into entirely new industries (Saylor Academy). One advantage of diversification is that it aids a firm to grow when it has excess capital but lack opportunities to invest in the same industry. By having another company out of this industry creates a viable chance of utilizing the cash rather than keeping it idle in the bank. Additional this strategy also increases the customer base of a firm making it easy for the company to cross-sell its goods to a newer customer base and this leads to an increment in the sales quantity hence higher gross profit.
Unrelated diversification is whereby a business ventures into an industry that is less essential similarities with its contemporary sector. An example is how Coca-Cola bought a movie studio. On the other hand, related diversification is a situation in which a company enters an industry that has vital resemblances with its existing industry. Unrelated diversification is quite a huge risk and can only be taken by large universal companies. Related diversification is a strategy that any business should try considering that chances of making losses are quite minimal. The approach also assures a business constant flow of income.
Kokemuller, N. “The Advantages of a Vertical Integration Strategy.” 26 Oct. 2016, smallbusiness.chron.com/advantages-vertical-integration-strategy-20987.html.
Saylor Academy. “Mastering Strategic Management.” 2012, saylordotorg.github.io/text_principles-of-managerial-economics/s05-economics-of-organization.html.