Strategy used to exercise control over Market Industry Definition of Horizontal Integration The merger of two or more firms, which are engaged in the same line of business and their activity level is also same; then this is known as Horizontal Integration. Horizontal Integration reduces competition between firms in the market, as if the producers of the product get combined they can create a monopoly. However, it can also create an oligopoly if there are still some independent manufacturers in the market.
An illustration of vertical integration process. Forward integration is a strategy where a firm gains ownership or increased control over its previous customers distributors or retailers. Backward integration is a strategy where a firm gains ownership or increased control over its previous suppliers.
What is vertical integration? This strategy is one of the major considerations when developing corporate level strategy. The important question in corporate strategy is, whether the company should participate in one activity one industry or many activities many industries along the industry value chain.
For example, the company has to decide if it only manufactures its products or would engage in retailing and after-sales services as well. Two issues have to be considered before integration: An organization should vertically integrate when costs of making the product inside the company are lower than the costs of buying that product in the market.
Scope of the firm.
A firm should consider whether moving into new industries would not dilute its current competencies. New activities in a company are also harder to manage and control. The answers to previous questions determine if a company will pursue none, partial or full VI. The example below illustrates a general industry value chain and none, partial or full VI of a corporate operating in that industry.
Difference between vertical and horizontal integrations VI is different from horizontal integrationwhere a corporate usually acquires or mergers with a competitor in a same industry.
An example of horizontal integration would be a company competing in raw materials industry and buying another company in the same industry rather than trying to expand to intermediate goods industry.
Types of vertical integration Firms can pursue forward, backward or balanced VI strategies. Forward integration If the manufacturing company engages in sales or after-sales industries it pursues forward integration strategy.
This strategy is implemented when the company wants to achieve higher economies of scale and larger market share. Forward integration strategy became very popular with increasing internet appearance.
Many manufacturing companies have built their online stores and started selling their products directly to consumers, bypassing retailers. Forward integration strategy is effective when: Few quality distributors are available in the industry.
Distributors or retailers have high profit margins. The industry is expected to grow significantly. There are benefits of stable production and distribution. The company has enough resources and capabilities to manage the new business.
Backward integration When the same manufacturing company starts making intermediate goods for itself or takes over its previous suppliers, it pursues backward integration strategy.
Firms implement backward integration strategy in order to secure stable input of resources and become more efficient.Home» Arauco (A): Forward Integration or Horizontal Expansion Arauco (A): Forward Integration or Horizontal Expansion HBS Case Analysis This entry was posted in Harvard Case Study Analysis Solutions on by Case Solutions.
When it comes to a vertical integration, a company can either integrate forward or backward. Backward integration occurs when a company decides to buy another company that makes an input product. Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers.
There are three varieties of vertical integration: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (both upstream and downstream) vertical integration. Several times we have observed the interesting case where a group of oligopolists that supply a low-growth commodity product to a reasonably fragmented, low-power buying industry use forward integration to avoid price-based competition.
rutadeltambor.com (A): Forward Integration or Horizontal Expansion? ber under the assumption that the FCFs are around $m per year.
maintaining a constant gross margin and above all increasing the net income margin Exhibit %) because it is only backward integrated and focused on its core business. high leveragebn. /5(3). Arauco ltd – forward integration or horizontal expansion 1.
CASE SUMMARIES – FOR STRATEGIC MANAGEMENT CLASSLecture 2:Corporate Strategy: Expansion, Integration, Diversification A) Arauco Ltd – Forward integration or Horizontal expansion?In early , Mr. Perez, the president of the Chilean forestry company: Arauco ltd.
was about topresent his recommendations to the board of .