Increasing production at the same portion of the supply chain, or horizontal integration, is one way of expanding your business. It can be accomplished through acquisitions, mergers or internal expansion. There are several legal and economic implications to consider when attempting to take advantage of the advantages of horizontal integration.
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Mergers
Typically, horizontal integration involves two companies merging and forming a new entity. This combined entity can be used to diversify a firm’s portfolio of offerings. It can also lead to economies of scale and better business efficiency.
Horizontal integration deals are often pursued by firms seeking growth. These mergers increase the market share of a company and improve the firm’s position in the market. In the future, more horizontal integration deals are expected to be lined up.
Typically, horizontal mergers occur when firms compete in a similar industry. The new firm has a larger customer base and can offer more products. These firms can also increase their prices by negotiating more favorable terms with suppliers. They can also expand into other markets.
A horizontally integrated firm can improve its market share by combining its product base, extending its business activities, and utilizing shared technology. It can also benefit from cost synergies in marketing.
However, horizontal integration can also have negative effects. For example, a company may not be able to produce the products it wants or may not be able to operate efficiently. This could limit the firm’s ability to innovate and compete. It may also create a monopoly.
Regulatory bodies can scrutinize horizontal integrations and impose antitrust laws. If the government perceives that the merger is against the public interest, it can disallow the deal. In addition, vertical mergers may be subject to increased scrutiny.
Horizontal integration is a common strategy in corporate finance. Normally, the participants in a horizontal merger are close competitors. They merge to take advantage of the economies of scale that are associated with the combination of operations.
The FTC requires that the cost savings that come with horizontal integration outweigh the increase in market power. The agency may also be hesitant to consider economies of scale as a merger-specific efficiency.
Acquisitions
Among the benefits of horizontal integration is the ability to tap new markets, increase market share and reduce competition. This can be accomplished through mergers or acquisitions.
Depending on the size of the merged company, the acquiring firm can expect to benefit from economies of scale. This occurs when the merged company can produce more output for a lower cost than the combined companies could produce alone. This decreases costs for both the acquiring firm and the target firms.
The size of the merged company also increases its buying power. This allows the acquiring firm to negotiate better with vendors, suppliers, and distributors. The increased buying power gives the merged entity a larger proportion of the overall market share. This can lead to lower prices for consumers and better production efficiency.
Similarly, horizontal integration can lower the costs of international trade. When an American restaurant chain buys a European restaurant chain, it can avoid building foreign operations from scratch. Alternatively, it can also expand its product offerings, which will increase its market.
In addition to the benefits of cross-selling, horizontal integration can also help reduce costs and create new monopolies. Specifically, the acquiring firm can gain access to new markets, improve its product offerings, and gain access to client and market information.
While horizontal integration is a great way to boost business, there are risks to consider. A poorly integrated merger can destroy value and cause antitrust investigations. It can also affect the corporate culture of the merged entity.
Another disadvantage of horizontal integration is that it can reduce flexibility. The merged entity’s management may have different opinions about how to run the business. In turn, these differences can create unexpected inefficiencies. This can also limit the company’s ability to innovate.
Internal expansion
Often, companies adopt horizontal integration and internal expansion strategies to expand in different markets. The strategy provides companies access to new markets, increased market share, economies of scale, access to information, and more. But it can also lead to business monopolies, and complex management situations.
One of the most common types of internal expansion involves reinvesting capital in a firm’s existing operations. Depending on a company’s needs, this may involve investing in a new manufacturing plant or setting up a distribution center. Alternatively, the company may choose to merge with another firm.
A successful merger can create large market shares for an integrated business unit. The firm can expect economies of scale by reducing costs associated with production and distribution. In addition, it can reduce the number of competitors in the industry. The merged firm may charge a higher price to customers.
Unlike vertical integration, which focuses on the development of a new business operation, horizontal integration aims to improve the effectiveness of a current product and service portfolio. This is achieved by combining a company’s product and service offerings. This can also enable a firm to increase its market share through cost synergies in marketing and business activities.
When two companies merge, they bring with them a different consumer base. These differences may be unexpected, and can result in inefficiencies that have not been anticipated. In addition, a merged firm can have a lower quality product and less flexibility in market innovations. These differences may influence the opinions of managers, which can have negative consequences.
On the other hand, a company that specializes in a particular line of products may wish to expand into a new product or service area. A manufacturer of beverage products can choose to branch out into food products. Similarly, a restaurant may decide to merge with a similar restaurant in another country to avoid building a distribution network from scratch.
Diseconomies of scale
Economies of scale are generally associated with lower costs per unit of production. However, there are also diseconomies of scale. These occur when a company produces more than it can afford. They increase the long-run average cost of each unit it produces, and they usually require additional capital investment.
A company that expands its production may have to buy more inputs and hire more employees. It may also invest in new equipment and facilities, but the increased production may not be efficient. This is called the overcrowding effect.
In addition to external costs, there are internal ones. These can be caused by mismatched outputs, duplication of work, and problems with management and communication. They can also result from technical issues, such as lack of coordination.
Another form of diseconomies of scale occurs when companies grow too quickly. The larger the company, the harder it is to monitor and control. As it grows, the company is less flexible and less committed to its workers. This can lead to boredom, trade unions, and monopoly.
A large company’s ability to operate will be limited by its high debt and capital requirements. Its managers will have a hard time controlling challenges. There are many different departments within the company, and there are a lot of people to manage. The company may not be able to hire more managers when it expands, so its employees will feel as if they are less committed to their jobs.
Horizontal integration is a type of business model. When a company merges with other companies of the same size, it expects to benefit from economies of scale. This can result in significant overlap between the products produced by the two companies. It can also result in lower costs and some product differentiation.
Legal implications
Depending on your industry, horizontal integration can have various benefits. It can lead to increased market share, economies of scale and reduced costs. However, it can also have its own set of drawbacks.
When a company acquires another company, it tends to become a monopoly. This can create problems for consumers and regulatory bodies, especially if the acquiring company’s products or services are not competitive.
Horizontal integration can also reduce costs and increase profitability, but it can have its own downsides. Some companies may end up losing key employees or their overall value. In addition, there may be unexpected inefficiencies, such as higher prices than competitors.
It is important to understand the legal implications of horizontal integration before committing to a merger or acquisition. In some cases, antitrust laws might prevent the deal from going through. In other instances, the competition authorities will want to see how the two parties work together.
One of the biggest advantages of a horizontal integration is the opportunity to enter new markets and expand your consumer base. With a larger customer base, you can offer a broader selection of products, which in turn can increase your revenue.
The other major advantage of horizontal integration is the synergies it creates. By merging product lines, technology, and product bases, companies can improve their profitability and market share. Moreover, they can reduce the time and expense involved in manufacturing and distributing their products.
Aside from the synergies mentioned above, there are several other reasons to integrate. Among them is the potential to raise entry barriers for competitors. A company’s monopoly power can allow it to increase profits by using unethical practices. The federal government is working to protect consumers from monopolies.