Companies that implement a related diversification strategy may benefit from which of the following
Horizontal Integration vs. Vertical Integration: An OverviewHorizontal integration and vertical integration are competitive strategies that companies use to consolidate their positions and set themselves apart from their competitors. Both are corporate growth strategies that involve the acquisition of other businesses. While they can help companies expand, there are important differences between these two strategies. Horizontal integration occurs when a business grows by purchasing related businesses—namely, its competitors. Vertical integration, on the other hand, occurs when a business takes control of one or more stages in production or distribution, thereby owning all of the parts of the industrial process. Show
Key Takeaways
Horizontal IntegrationHorizontal IntegrationHorizontal integration is a growth strategy that many companies use to boost their position within their industries and to get an edge on their competition. They do this by taking over another company that operates at the same level of the value chain. This means both companies offer similar (if not the same) goods and services, and deal with the same customer base. The primary goal of horizontal integration is to grow through the acquisition of one or more competitors that function within the same industry. Other goals include:
If a department store wants to enter a new market, merging with a similar company in another country can help it to start operating overseas. Doing so would allow the company to generate more revenue and reach a wider market. Ideally, the newly-formed company would make more money as a single unit compared to when they operated independently. Horizontal integration allows companies to cut down on their costs by sharing technology, marketing efforts, research and development (R&D), production, and distribution. Horizontal integration usually works best when two companies have synergistic cultures. The process may fail if there are problems when the two cultures merge. Vertical IntegrationVertical integration is a corporate strategy that involves growth through streamlining operations. This occurs when one company acquires a producer, vendor, supplier, distributor, or other related company within the same industry. Companies that choose to integrate vertically do so to strengthen their supply chains, reduce their production costs, capture upstream or downstream profits, or access new distribution channels. Not only does vertical integration increase profits from the newly acquired operations by selling its products directly to consumers, but it also guarantees efficiencies in the production process and cuts down on delays in delivery and transportation. Companies can integrate vertically by moving backward or forward:
Companies may achieve vertical integration through internal expansion, an acquisition, or a merger. Advantages and Disadvantages of Horizontal Integration vs. Vertical IntegrationHorizontal IntegrationWhile there can be many benefits to horizontal integration, the most obvious benefit is an increased market share for the company. When two companies combine, they also combine their products, technology, and the services that they provide to the market. And when one company multiplies its products, it can also increase its consumer foothold. Here are some of the other benefits associated with horizontal integration:
Even though a horizontal integration may make sense from a business standpoint, there are downsides to horizontal integration for the market, especially when they succeed. This kind of strategy faces a high level of scrutiny from government agencies, which is why antitrust laws are in place. Additionally:
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Vertical IntegrationVertical integration helps a company:
The drawbacks of vertical integration include:
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Horizontal Integration vs. Vertical Integration ExamplesHorizontal Integration Examples
Vertical Integration Examples
What Is Horizontal and Vertical Integration?Horizontal integration is an expansion strategy adopted by a company that involves the acquisition of another company in the same business line. Vertical integration refers to an expansion strategy where one company takes control over one or more stages in the production or distribution of a product. Both of these strategies are undertaken by a company in order to consolidate its position among competitors. What Is an Example of Horizontal Integration?Horizontal integration is one of the most common types of mergers. As a result of horizontal integration, competitors in the same market combine their operations and assets. An example of horizontal integration would be if two consulting firms merge. One of the firms offers software development services in the defense industry; the other firm also provides software development but in the oil and gas industry. Who Uses Horizontal Integration?Companies that seek to strengthen their positions in the market and enhance their production or distribution stage use horizontal integration. Why Is Horizontal Integration Important?Horizontal integration can greatly benefit companies. It is important because it can grow the company in size, increase product differentiation, achieve economies of scale, reduce competition, or help the company access new markets. The Bottom Line Horizontal integration and vertical integration are two different growth strategies that can help companies expand their operations. Although the ultimate goals may be the same, there are important
differences between the two strategies. Horizontal integration involves acquiring or merging with competitors while vertical integration occurs when a firm expands into another production stage like acquiring a supplier or distributor. As such, vertical integration is the process of acquiring business operations within the same production vertical. A company that opts for vertical integration, though, takes complete control over one or more stages in the production or distribution of a
product. What is a related diversification strategy?Related diversification occurs when a firm moves into a new industry that has important similarities with the firm's existing industry or industries (Figure 8.1). Because films and television are both aspects of entertainment, Disney's purchase of ABC is an example of related diversification.
How can companies benefit from unrelated diversification?Unrelated diversification provides the opportunity to change to industries that are more profitable. In addition, when the firm's primary business is located in a highly fluctuating industry, a company can reduce its risk by diversifying into unrelated businesses.
Which of the following is an example of a diversification strategy?The correct answer is e) Market expansion. To diversify, a company will expand to a new market.
What are three reasons firms choose to diversify their operations?There are four most often cited reasons for diversification: the internal capital market, agency problems, increased interest tax shield and growth opportunities.
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