Advantages and Disadvantages of Vertical and Horizontal Integration - Essay Example

?Introduction Basically, businesses are set up to commercialize innovations and provide solutions to members of the public (Kotler, 1994). This therefore means that businesses are set up to provide something of value that consumers are prepared to exchange consideration for. Most businesses exist as profit making organisations for their owners. One of the most important elements of businesses is survival. For a business to thrive through different timelines and periods, there is the need for businesses to find ways and means of remaining profitable (Kotler, 1994). This implies that businesses will need to modify their ways of production and find ways and means of keeping their customers satisfied. Aside customer satisfaction, businesses also need to stay ahead of other players in the industry by remaining competitive. Survival of a business is strongly linked with its ability to grow. There is a popular saying that one needs to evolve or become extinct. This implies that businesses need to find ways and means of growing and expanding to meet these evolutional needs. Due to the complex nature of businesses and the complications that can come up when a business is expanding, there are numerous approaches through which a business can expand by way of acquiring other businesses. The use of acquisition and mergers comes with so many business and managerial requirements that must be examined closely at each and every point to ensure that optimum results are attained. This paper examines the concept of expansion through vertical and horizontal integration. These two concepts are very crucial in that they provide significant business modelling systems and tools that can determine the main structures of the business. They come with advantages and disadvantages that can have overwhelming effects on businesses and their operations. The paper attempts an in-depth application of the concept of mergers and acquisitions to businesses in the technological sector. It examines the advantages and disadvantages of vertical integration and horizontal integration in the technological sector. Business Growth Businesses grow for several reasons. As stated above, a business may chose to grow in order to attain competitive advantage. A business might also grow to survive or to increase its capacity in order to attain its strategic objectives. Hill & Jones (2010) identify that there are four main reasons why a business might choose to ‘reposition’ itself. In other words, a business might want to change its structures and systems through various means of acquisitions or control of other ventures that are closely related to it. According to Hill & Jones (2010), the first reason why a business might want to reposition itself is for the purposes of improving the company’s competitive position. In other words, the business might want to become much more formidable in maintaining its share in the control of valuable resources like the markets and/or the inputs that are used for production in the industry. Secondly, a business might want to improve its profitability situation. In other words, businesses might want to increase their earning powers and control more income or revenue streams through some expansion or re-positioning exercise. Thirdly, a business might want to enhance production. In other words, a business might want to find efficient and effective ways of producing the same thing. In this wise, they might seek to produce more from a given volume of inputs or increase the volume of production they undertake. Finally, a business might want to diversify so that they reduce risks and enhance returns. This might be done through the controlling of different income generation sources rather than a single or fewer income generation streams. This is done through various techniques like the creation of new business units or new products which can provide value to consumers and in effect provide some more revenue for the company. In this wise, the business will not have to rely excessively on a single income generation unit which could be detrimental when that unit fails to yield results. Thus the expansion to control other income generation streams is a very vital component of business growth. Businesses can attain their expansion through numerous schemes and systems like building from the scratch. Thus for example a clothing company that wants to expand to produce shoes as well can set up the infrastructure for that purposes and build a new company from the scratch. However, it is much more common for businesses in the 21st century to expand by means of acquiring other established business entities (Sullivan, 2008). There are two strategies that can be pursued in expanding one’s businesses through acquisitions and mergers (Hill & Jones, 2010). The first is through horizontal integration and the second is through vertical integration. Each of these strategies has distinct features and structures which enable businesses, including technology based businesses to attain some or all of the five requirements of business growth and expansion. Horizontal Integration Horizontal integration refers to the situation where a business remains in a single sector in its expansion drive (Hill & Jones, 2010). This means that the business expands to control other businesses that focus on the same activity that the business is involved in. There is therefore little concern for other businesses that have operations that might dissimilar to what the business does. Horizontal integration aims at profit maximization from a single sector. In other words the main objective for such expansions is to ensure that the company maximizes returns for its owners and reduce losses. It therefore focuses on growth in terms of production capacity as well as the volume of goods and services that is produced with little or no concern for activities that are not within the scope of the business. It therefore involves expansion in production capacity through the acquisition of other businesses in the area that the company operates. This typically involves business consolidation and acquisitions that have the same line of activities that are similar to the business. The aim of horizontal integration is to make a business dominant in its industry through gaining more bargaining power and economies of scale which comes with the acquisition of a firm’s competitors. This is because a firm that is able to acquire its competitors is naturally going to become more powerful and there will be little to worry about as the business growth. Also, a business that aims at product differentiation can move on a path of horizontal integration. This is because when a business acquires its competitors, it is likely to have access to the product differentiation techniques and tools that existed in the business. This will enable the business to produce more different products in the same industry but with different features. This will ultimately strengthen the business’ scope of control in the industry. Since horizontal integration replicates the business model, there is little risk that the acquisition of new businesses poses to the survival of the business. This is because the business can maintain its core competencies and just add on familiar competencies from other competitors. This implies that the management and staff already have skills and potentials that have been consolidated in the past. They will only need to apply the same systems to similar businesses, thereby reducing the risk of failure in such mergers and acquisitions. Horizontal integration reduces rivalry in the industry. This is because it can be seen as the agglomeration of businesses of the same kind in the industry. This therefore reduces marketing wars and campaigns that can prove to be wasteful. Rather, a mammoth company in an industry can be seen to be much more effective and efficient in its operations by channelling resources into productive activities and ventures which can yield more value for the company. Finally, horizontal integration increases the bargaining power of all internal stakeholders of a company. The company becomes more dominant and powerful with its business partners. This means that negotiations are more likely to end up in the favour of a business that seeks to integrate horizontally, because it is seen to be more dominant in the industry. Also, internal stakeholders like workers can build more bargaining powers and strengths to carry out demands for better conditions which will ultimately enhance production. The downside of horizontal integration on the other side is that it increases risk. This is because the business concentrates more of its resources in a single industry. This therefore means that a small adverse situation that befalls the company can bring the company to its knees. This is because the business concentrates all its resources in a single sector and this gives room for many challenges that can ultimately destroy the business if things go wrong. Also, horizontal integration comes with the virtual elimination of competitors. This implies that there will be little competition and this can adversely affect innovation and reduce motivation for attaining excellent results. Aside harming innovation and competition, horizontal integration comes with other legal issues like monopolistic problems and issues. Vertical Integration Vertical integration on the other hand involves a business entering different industries to strengthen its core industry. This means that the company expands by purchasing or merging with other businesses that have an influence on the operations of the business in question. There are two types of vertical integration; there is the backward integration where a business expands to purchase businesses that produce raw materials for its operations. Thus for example, a petroleum refinery company might opt to acquire a petroleum excavation field in order to control the production of crude oil to its refineries. There is also forward vertical integration which involves the acquisition of distribution and sales outlets that market and sell the products. Using the example above, this can be applied in a situation where the petroleum refinery acquires the various filling stations and petroleum marketing companies in order to have direct control over how their refined fuel is sold. In these two examples, we notice that the company acquires businesses that have competencies that are different from its own core competencies; however, they are related to their operations and activities. Growth in the Technology Sector The technological sector comes with some features and structures that makes it a bit different from other businesses and activities (Estrella & Tolentino, 2004). The main factors that make it different lies in the uniqueness of the technological transfer systems and the transfer of knowledge in these sectors (Sundaram & Fehler, 1999). First of all, the sale of technology brands and intellectual properties comes with some risks relating to duplication and misuse (Cohen, 2004). This therefore means that there are challenges that need to be genuinely discussed and solutions found to them before any expansion drive is undertaken. Secondly, the technological industry thrives on talented individuals, thus expansions are subject to the availability of people with relevant skills (Betz, 2011). This therefore means that the choice to expand in the technological sector is strongly influenced by the ability to transfer necessary skills and potentials to individuals who have roles to play in the company. Additionally, expansion is strongly influenced by important components like the ability to innovate and develop systems periodically (Mehta, 2009). This implies that a business will always need to ensure that there is a promise of continuous improvement that can ensure that the business in question remains viable after the growth is commenced. Also, the expansion of a business in the technological sector needs to be sensitive to the legal requirements and expectations of the country or countries involved in the expansion (Cohen, 2004). This therefore means that the choice of expansion must be one that is done with a constraint of legal and compliance requirements of the nation in question. Horizontal Integration in the Technology Sector Horizontal integration in the technological sector involves the acquisition of similar brands and companies that do similar things to what the business does. It aims at controlling more of a sector and the concentration of skills and ability of people in similar sectors. Horizontal integration in the technological sector is often aimed at providing monopoly in spite of the fact that this is a very difficult thing to achieve. This is because the technological sector is made up of a lot of innovation and this makes it quite tough for a business that seeks to go on such a path. An example is Google, which has specialized in the purchase of brands around the world that are similar to its primary brand. They have sought to acquire more and more of these with the hope of diversifying and controlling more website-oriented companies around the world that will give them dominance on the global internet market. Horizontal integration is most technological sectors is quite easy because knowledge transfer simply builds on what was existing in the company that was acquired. Also, the transfer of technology is often not very critical because the existing company might have its own technological structures that are efficient enough. The main challenge might relate to harmonization and standardisation of technological systems and structures. Advantages of Horizontal Integration in the Technology Sector The main advantage of horizontal integration in the technological sector lies in the fact that a technological company can cut down costs tremendously. This is because the models and IT infrastructure that is set up for one company is likely to be usable for different companies in the industry. This therefore means that there is cost leverage through the horizontal integration of technological companies. Secondly, promotion and advertisements can easily be done in a horizontally integrated setting because the markets for technology are often related. Thus if a person controls a number of businesses in the same industry, there is the likelihood that similar customers can be attracted through the various companies and this can enhance the grip of a company in a given sector. Horizontal integration also gives room for product differentiation and the targeting of various niche markets. This is because when a business has several brands or products, various adaptations can easily be made to satisfy specific needs of the community. This gives room for improved earnings and the growth of the company's brand. Knowledge transfer is much more easier and convenient in a horizontally integrated technology company. This is because specialized staff members can easily be moved from one unit to another to enhance co-operation and improve activities. This is likely to cause positive results for the business. Disadvantages of Horizontal Integration in the Technology Sector The main disadvantages of horizontal integration in the technological sector is that it can lead to monopoly which can cause legal friction. This is because when a business continues to grow and remain dominant in a given field, it is likely to discourage other businesses from succeeding in the same sector. This can lead to anti-competitive tendencies. A typical example is that of Microsoft which was taken to court for monopolising the IT industry. Additionally, due to the competitive nature of the technology sector and the proliferation of new innovations on a regular basis, it is risk for a business to focus on a single sector. It is much wiser for a business to go into vertical integration to spread out its risk rather than remain focused on a single industry which can become obsolete in a very short period of time. Vertical Integration in the Technology Sector Vertical integration in the technology sector is much more related to the purchase and control of related companies and industries to support the expansion of a business. In this case, a technological company might either purchase its research or technological infrastructure company or the production and/or marketing outlet. This is to give the business a control of its operations and also enhance its grip of the industry it concentrates in. Advantages of Vertical Integration in the Technology Sector The main advantage in the technological sector is that vertical integration can be a system through which a business can control vital and important entities that provide a lifeline to the company. For instance, a research company might be purchased to ensure that innovation, which is the lifeblood of the company to be conducted in perpetuity. Vertical integration can improve scheduling in the technological sector. This is because when a business controls some important businesses related to its operations, it can always have direct control of schedules. In a sector where timeliness is important, this can prove to be a competitive tool. Disadvantages of Vertical Integration in the Technology Sector On the other hand, there could be issues like the cost of maintaining new technology and harnessing knowledge in a completely different area of business. This can push up costs and cause so many challenges that can be significant on profitability of the company. Secondly, this venture is quite unpredictable. This is because it is often a new activity and could end up being too expensive in relation to other transactions and activities. This therefore implies that it vertical integration comes with substantial risks which can eventually collapse a technological business if care is not taken. Conclusions Businesses need to survive and grow. The most popular method of doing this is through expansion which is often done through the acquisition of other businesses. There are two types of expansion, vertical integration and horizontal integration. Vertical integration involves acquiring other related businesses that have different activity lines. Horizontal integration involves buying businesses in the same sector or industry. In the technological industry, horizontal integration has the advantage of reducing risk and leveraging resources. Its downside includes the increase of risks and also the possibility of attracting legal suits. Vertical integration is less risky in the technological sector. It can also prove decisive in the survival of a business because it might be necessary to keep the business going. On the other hand though, vertical integration can be expensive and come with high levels of uncertainty. References Betz Fredrick (2011) Managing Technological Innovation: Competitive Advantage for Change Hoboken, NJ: John Wiley & Sons Cohen, Goel (2004) Technology Transfer: Strategic Management in Developing Countries London SAGE Publications Estrella Paz, Tolentino E. (2004) Technological Innovation & Third World Multinationals London: Routledge Taylor Francis Group Hill, Charles & Jones Gareth (2010) Strategic Management Theory: An Integrated Approach Mason, OH: Cengage Kotler, Philip (1994) Competitive Advantage Financial Times Publishing Mehta Shreefal, S. (2008) Commercializing Successful Biomedical Technology Cambridge University Press Sullivan Neil, S. (2008) Technology Transfer: Making The Most of Your Intellectual Property Cambridge University Press Sundaram, Jones Kwame & Felher Greg (1999) Technology, Competitiveness & The State London: Taylor & Francis Group Read More