Vertical and Horizontal Integration Flashcards
- Corporate level strategy
o Where to compete? a strategy that focuses on gaining long-term revenue, profits, and market value through managing operations in multiple businesses or industries
- Three dimensions of corporate level strategy
o Stages of industry value chain and degrees of vertical integration
o What range of products and services and degrees of horizontal integration and diversification
o Where in the world to compete in global strategy
• Vertical integration
o an expansion or extension of the firm by integrating preceding or successive production processes in the value chain.
o If the cost of doing it inhouse is cheaper than the cost of hiring outside firms, them vertical integration is good
o The advantages can include greater efficiencies and reduced costs.
• Forward vs backward integration:
o Forward vertically integrated companies are businesses that are involved at the beginning of the supply chain, and integrate by controlling other stages.
o Backward vertically integrated companies are established at the end of the supply chain, but decide to integrate at the front stage of the process.
• Forward integration example:
o Walt Disney introduces Disney+
o Stream on-demand content directly to end customers
o Advantages: more control of distribution chain, increase barriers to entry due to control over distribution network, increased market share because can distribute to new markets faster, reduces cost of distribution
• Backward integration example
o Netflix going backwards and creating its own content rather then relying on other production companies
o Generate greater revenue by creating own original content
o Create competitive advantage because the create own demand around their content that cannot be consumed on any other channels.
o Advantages: achieve economies of scale, reduce dependency on suppliers, gives control over purchasing power, increase barriers to entry for new competition (control sourcing and production which is difficult to replicate)
• Antitrust scrutiny with vertical integration
o When vertical integration is through a merger, which involves integration of firms who do not compete against each other.
o Vertical integration through a merger may unduly harm competition in the marketplace
o If the merger through vertical integration changes patterns of industry behavior such as competitors finding avenue for suppliers blocked or new competitors are discouraged from entering the marketplace
- Horizontal integration
o the acquisition of a business operating at the same level of the value chain in the same industry—that is, they make or offer similar goods or services.
o optimizes the consolidated strategic business activities and processes and share core competencies
o help companies grow in size and revenue, expand into new markets, diversify product offerings, and reduce competition.
- can benefit economies of scale and economies of scope
- Diversification:
the process of firms expanding operations by entering new businesses
o Should provide synergy
- Increases firm’s ability to take advantage of economies of scale and economies of scope
- Ways to diversify or horizontally integrate:
o Mergers, acquisitions, strategic alliances, joint ventures
- Example of horizontal integration:
o Marriott acquisition of Starwood
o More variety in product offerings, economies of scale with owning more parts of the supply and distribution chain, purchasing power, acquisition of loyal and expansive customer base
- Antitrust scrutiny and horizontal integration
o Can be subject to antitrust it the merger is anticompetitive.
o Can create a monopoly that creates a dominate position for the company in its industry, which excludes other viable competitors from competing or entering the market
o Monopolies can cause the firm to set prices and in the absence of customers, raise them at will
o Creates a market with the absence of competition
