Strategic Management
Jason Student
Management 497 -x, Strategic Management
February 16,2017 * il" \- 1r.[r., i> $u*o
Concept Integration Paper #l\
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Strategic Leadership and Strategic Management
Introduction
In a fragmented Industry there are many options for a company to develop strategies in
order to realize the advantages of a cost-leadership or differentiation business model. I however
believe that pursuing horizontal integration is the most effective in the current economic rapidly
changing business environment and it will also set the foundation for the company to perform
successfully in both the short- and long-term marketplace.
This reporl discusses the advantages of horizontal integration in a fragrnented industry. I
will first explain why the potential benefits of a well-implemented horizontal integration strategy
outweigh the potential limitations. I will then discuss the advantages and disadvantages of other
possible strategies and explain why horizontal integration would be superior in each case. To be
sure, all of the other strategies can be effective and have been used by very successful companies
in the past. But in today's economy I believe that a horizontal integration strategy presents the
rnost options and possibilities for success. I will conclude describing why a horizontal integration
strategy is the best option in today's changing business climate and why a well-implemented
strategy of horizontal integration will be a solid business strategy for a company's future
endeavors.
Potential Benefits of Horizontal Integration
There are two main approaches to horizontal integration: acquisition of another company
or a merger between two companies to create a new entity. There are several obvious reasons why horizontal integration can benefit a company as well as several reasons that rnight be more
hidden and cornplex. First, if a company decides to stay in one industry, it will allow them to
focus on its total managerial, financial, technological, and functional resources and capabilities
on competing successfully in one area. "This is important in fast-growing and changing
industries, where demands on a company's resources and capabilities are likell,' to be substantial,
but where the long term profits from establishing a competitive advantage are also likely to be
significant" (Hill, 305). For example, a well-established company that produces several models
of high definition televisions could decide to get into the market to rnake video game systems.
For the company to successfully move into the new market, it will require thern to fotm a new
management division fbr the video game system, transfer alarge amount of funds towards R&D
among other expenses, and invest in the required resources to make the game consoles. This
varies among industries because of the high and low levels of barriers to entry but it is an issue
fbr any company to consider regardless the level. For this company the barrier is fairly moderate
but it will still put a large burden on the company's television market because they lost their key
fbcus on their "bread and butter" product, the high definition television. This gives other
competitors in the television market the chance to match or pass them because they lost some of
their competitive edge in the market. That example leads into the next benefit of horizontal
integration whicli is a company stays focused on what is knows and does best. For the company
who produces high definition televisions who is planning to enter the video game console
market, they will meet a new set of competitors, suppliers, and custotners who they are not
familiar with which brings unanticipated challenges to the company.
Horizontal integration also benellts the company's profitability in less obvious reasons.
"Horizontal integration can lower a company's cost structure because it creates economies of scale" (Hill). This probably the one of the biggest, if the not the biggest benefit for companies
who have a high fixed cost structure such as manufacturing firms. A second benefit of horizontal
integration is increased product differentiation. lf a company mergers with another company or
acquires a company, it now can offer a wider range of products due to the horizontal acquisition.
The company can now offer different lines of a product or offer the different products in a
package deal which increases differentiation. A third potential benefit of horizontal integration is
if a successful company acquires a smaller struggling company in the industry, it now can
replicate their successful business model to repeat the same results in the newly acquire
company. A fourth possible benefit of horizontal integration is the more companies that you can
acquire or merger with in the industry means that the less competitors that you have to compete
with. lf enough of the industry is under the company's control it then can stad to set the price
standard fbr its' products. which gives the firm a huge edge. A fifth and t-rnal reason that
horizontal merger's can benefit a company is that it allows lbr an increase in bargaining power
over suppliers and buyers. Blockbuster is a great example of this, as they starled to grow and
acquire other video stores, they started to be able to buy movies from the studios at a reduced
priced. This created a huge problems for its' smaller competitors who couldn't use the same
strategy (Hill, C199).
Other Possible Strategies in a Fragmented Industry
A company can decide to pursue a chaining strategy with in many ways is very sirnilar to
horizontal integration in many ways, such as allow for companies to establish buying power, the
sharing of infonnation and economies of scale. Chaining however, involves opening new stores
rather than acquiring or merging with ones that are already establish in their area. This has
proved to be effective for companies such as Wal-Marl but a chaining strategy doesn't allow companies to do a uumber of things that horizontal integration does. One of the biggest flaws
that chaining doesn't fulfill is no matter how many chains stores that you open up you still have
to compete with your competitors instead of acquirir-rg thern and eliminating them from the
market. For example, in my hometown of York, Pa, we have a several authentic Italian
restaurants that have been family owned and operated for decades. These individual restaurants
are very popular to York citizens and have large brand loyalty established. Olive Garden
Restaurant's practice a chaining strategy and tried opening two different restaurants within the
York area on separate sides of town. Instead of acquiring these'ohometown" restaurants and
eliminating their potential business threat, Olive Garden cornpeted with them and the end result
was one of the two closed and the other probably isn't bringing the same amount of customers as
other Olive Garden chains in other cities are. This case may be one that is rare but it shows that
horizontally acquiring a company elirninates the risk of competing with the company.
A second type of strategy to pursue in a fragmented industry is franchising. Companies
such as McDonald's and Subway use this strategy to allow individuals, the franchisees, to use
their name, reputation, and business model in exchange for fees and percentages of profits.
Companies have been successful using this strategy but it can create a situation when there are
two different parties who are both trying to be successful and make profits but may not see eye to
eye on different issues. "Sometimes when these views do not coincide it can create a possibility
of legal-ethical conflicts. A franchisor, fbr instance, may want to increase its presence in an area,
but it has an existing franchisee whose contract provides a right of first refusal should the
franchisor want an additional outlet in that geographic area" (Hill). With a horizontal integration
strategy this eliminates the possibility of this happening intemally within a company. The
company is united within all aspects of the company from the CEO to the individual store branch
4 manager. This possible threat to companies is a reality and can damage a company. For example
"a Missouri jury recently awarded a disgruntled franchisee $4.9 million from its franchisor, Entre
Computer Centers of Virginia tor alleged breach of the franchise agreement" (Hi11). A more
popular company such as "Subway has had 160 pending on concluded cases with their dillbrent
franchisees owners between 1990 and 1997" (Behar). Legal issues are not an issue for every
company that implements that strategy, however is tliat the franchisor's decision-making process
in such a situation is more complex than it would be absent the franchise setting.
Horizontal Integration in Today's Business Climate and in the Future
During boorn times, corporate chieftains often pursue acquisitions in the name of verlical
integration. The idea is that by exerting greater control over a series of steps involved in the
manufacture or distribution of a product or service, a company reaps profits for its shareholders.
But in tougher times, the benefits of merging sirnilar businesses horizontal integration can win
out (Cavaliere). Due to the economic down slump we are currently in, a horizontal integration
strategy would be the best to pursue. It allows the firm to be much more conservative because the
llrm doesn't control both upstream and down stream of the value chain which can be a \/ery a
risky strategy in a shaky economy. lnstead it allows the finn to just focus one dirnensionally on
their industry and limit their risks. A horizontal integration is also especially valuable over a
franchise because the structures and strategies of businesses are changing due to the market, so it
is very valuable to have a structure that allows them to do that without the limitations of a
franchise strategy. In the future when the economy recovers worldwide, a horizontal approach to
expanding a company will be a valuable one. It will give companies a strong advantage to be
able to compete with cument competitors and as well as upcoming competitors because they are
5 already established in the industry and have the resources to match the new technology and
strategies to excel in their market.
Conclusion
In a fragmented industry a horizontal integration is the most effective strategy for a firm
to pursue. It allows finns to establish economies of scale within their industry and eliminates
competitors. Horizontal integration has various advantages over other strategies as well.
Chaining brings a high level competitors in the market place to the firm which takes away
market share. Franchising greatly limits the firms' flexibility in a highly changing business
environment. A horizontal integration strategy is also the best approach especially in a struggling
economy today, as well as in the future when the economy recovers because of the broad
foundation it provides.
6 References
Behar, Richard. "Why Subway is 'The Biggest Problem In Franchising." Business Source
Premier. EBSCOhost, l6 Mar. 1988. Web. l1 Nov. 2009.
live>.
Cavaliere, Frank J. "The pros and cons of franchising: two views." Business Source Premier.
EBSCOhost, 4 May 2001. Web. 12 Nov. 2001 .
live>.
Cox, Rob. "Staying Horizontal." LexisNeytis. 13 Apr. 2009. Web. 14 Nov. 2009.
newsArticl e&ID: I 27 53 40&hi ghlight:>.
Downey, Charles, Daniel Greenberg, and Vivek Kapur. "REORIENTING R&D FOR A
HORIZONTAL FUTLJRE." Business Source Premier. EBSCOhost, Sept. & oct. 2003.
Web. 13 Nov.2009.
live>.
Hill, Charles W.L., and Gareth R. Jones. Strategic Manogement An Integrated Approach. 14th
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Stringlrarn, Shand H., Strategic Leadersltip and Stratcgic Managernent; Leading and Managing
Change on the Edge of Chaos, Bloornington, IN: iUniverse, Inc.
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