The motivation to pick horizontal integration is
• Horizontal integration enables an organization
to concentrate on all the assets and capacities like administrative, monetary, innovative
and functional of just a single industry.
• Unexpected risks can emerge when an
organization needs to go into new enterprises
such as new contenders, providers and purchasers which will result in insignificant
incentive to an organization and result in loss of benefit. This was the situation
when Coco-Cola choose to move vertical and venture into film business which
resulted in absence of competencies in the film ventures with diminishing value
to the organization and lower productivity.
• Horizontal integration enables two rivals in an
industry to converge in which one is an acquisition (one organization utilizes
its financial assets to purchase another organization) and turn into a merger
in which the two organizations share their assets and operation to make another
business such that it can concentrate better to keep up competitive advantage
over different contenders in the industry and hence profitability.
· Lower cost structure: When two organizations
with a high fixed cost structure converge, one can accomplish economies of
scale by spreading the fixed costs over expansive volume which will diminish
the average unit costs. For instance, in media transmission industry such as
Verizon and AT&T need to have fixed costs in growing rapid speed 4G and LTE
systems. These organizations converge with other tele associations to procure extensive
client base, increment the usage rates and consequently diminish the cost to benefit
every client. Likewise, when overall decrease of duplicate assets like separate
main offices, sales force and a greater amount of such assets can be eliminated
when the organizations merge which results in accomplishment of economies of
· Increase of Product Differentiation: When two organizations
combine, more inventive stream of ideas come helpful to create new items and offer
at a premium cost. Horizontal integration also let the mergers converge the
product offering such that a more extensive scope of product is offered to clients
at a solitary consolidated cost. Since, this strategy includes cost rebate, it empowers
the client to proceed with purchase those set of items from that organization continually
bringing about increasing competitive advantage and enhanced product
differentiation. Another way an organization can run over to differentiate the
product that is cross selling where the organization utilizes the power of past
established relationship with clients and give those clients an aggregate solution
as per their requirements. This outcomes in the product differentiation particularly
in IT organizations in which it gives full answer for clients by saving their money
and time at once.
· Reduced Industry Rivalry: Merging outcomes to cost
adjustment in the market by disposing extra limit in an industry. Besides, by lessened
number of rivalry in an industry, tacit price coordination is executed among
rivals which additionally prompt to less cost war in the market.
· Increased Bargaining Power over supplier and
buyers: By combining and becoming one expansive organization, it has more power
to bargain with their providers items which results in decrease of cost
structure. Increment of market power can be accomplished on account of
horizontal integration where the organization can build the cost to purchasers
and deal down the value it paid for its sources. For instance, Walmart has utilized
this strategy and leveraged to bargain down the cost it paid for sources.
· Leverage Competitive Advantage: Walmart is an illustration
that it leveraged its competitive advantage in its retail industry and also in its
chain of Sam’s club (less priced wholesale club). This was accomplished because
of Walmart’s great power of bargaining over providers and extremely well with
the inventory systems which empowered to achieve competitive advantage.
· Overestimation of the profits procured by
mergers and underestimation of the issues engaged in combining the organization
is one of the drawback that both the companies have to face.
· Federal Trade Commission (FTC) can turn into a
barrier while an organization is converging horizontally to become a prevailing
rival in an industry because the market power can be abused by the mergers by dominating
the new contenders to enter the market through slicing down the costs of the item
such that they cannot enter and then increasing the costs after they are out of
the market. For example, T-Mobile and AT&T contract was not success because
FTC understood that this contract would cause to cost increment for customers, reduced
development and disposal of contenders and lessening of purchaser decision.