Page 125 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Unit 7: Corporate Level Strategies

Notes

Task Give examples of vertical integration and assess the validity and feasibility of
those integrations.

Horizontal Integration
Horizontal integration is a strategy of seeking ownership or increased control over a firm’s
competitors. Some authors prefer to call this as horizontal diversification. By whichever name
it is called, this strategy generally involves the acquisition, merger or takeover of one or more
similar firms operating at the same stage of the industry value chain.
Recent acquisition of Arcelor by Mittal Steels and the acquisition of Corus by Tata Steel are good
examples of horizontal integration.
The most important advantage of horizontal integration is that it generally eliminates or reduces
competition. Other advantages are:
1. It yields access to new markets.
2. It provides economies of scale.
3. It allows transfer of resources and capabilities.
When horizontal integration is appropriate
Horizontal integration is an appropriate strategy when:

1. A firm competes in a growing industry.
2. Increased economies of scale provide a major competitive advantage.
3. A firm has both the capital and human talent needed to successfully manage an expanded
organisation.
4. Competitors are faltering due to lack of managerial expertise or resources, which the firm
has.

It should be noted that horizontal integration might not be an appropriate strategy if competitors
are doing poorly due to an overall decline in industry sales.
Some increased risks are associated with both types of integration. For horizontally integrated
firms, the risk comes from increased commitment to one type of business. For vertically integrated
firms, the risk comes from shortage of managers with appropriate skills or expertise to manage
the expanded activities. If there is much more potential profit in downstream or upstream
activities, it is better to go in for vertical integration.

Diversification Strategies
Diversification is the process of adding new businesses to the existing businesses of the company.
In other words, diversification adds new products or markets to the existing ones. A diversified
company is one that has two or more distinct businesses. The diversification strategy is concerned
with achieving a greater market from a greater range of products in order to maximize profits.
From the risk point of view, companies attempt to spread their risk by diversifying into several
products or industries.

Example: An air-conditioning company may add room-heaters in its present product
lines, or a company producing cameras may branch off into the manufacturing of copying
machines.

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