Horizontal Integration
Candlefocus EditorMergers and acquisitions are the two main strategies used for horizontal integration. Mergers refer to two distinct companies joining forces and forming one integrated entity, while acquisitions consist of one company acquiring another company. Horizontal integration is usually seen when two firms in the same business sector join forces to capture a larger share of the market and gain greater control over the supply chain. Through consolidating production or purchasing assets from other companies, firms can expand their market reach, reduce costs and increase profits by creating economies of scale.
It is important for businesses to consider regulatory bodies when deciding to pursue a horizontal integration. Governments often view mergers and acquisitions sympathetically, as long as competition is maintained in the affected markets and no anti-competitive activities are taking place.
Vertical integration is another tactic that is often seen in business. It is when a firm works with its suppliers or distributors, or buys an associated firm. The main advantage vertical integration offers is the ability to have complete control over the production and distribution of a product. This puts the firm in a better negotiating position, because it can dictate the terms and prices of its product. It also reduces reliance on outside suppliers, which could increase operational risk and expenditures.
The key factor that businesses must consider when deciding between horizontal and vertical integration is the market structure. Horizontal integration is the preferred strategy when the market is highly competitive and companies need to be able to control costs while expanding into new markets. In contrast, vertical integration may be a better fit in markets with high barriers to entry. Ultimately, a sensible combination of both approaches may be considered to ensure all possible benefits for the long-term success of the firm.