Strategic Management: Formulation and Implementation

Horizontal Integration

One of the most significant trends in strategic management today is the increased use of horizontal integration as a growth strategy. Horizontal integration occurs when a firm acquires or merges with a major competitors, or at least another firm operating at the same stage in the added value chain. The corporation's objective may be to become more efficient through larger economies of scale, to enter another geographic market, or simply to reduce competition for suppliers and customers. Market share will increase, and pooled skills and capabilities should generate synergy.

Kenneth Davidson makes this observation about horizontal integration:

The trend towards horizontal integration seems to reflect strategists misgivings about their ability to operate many unrelated businesses. Mergers between direct competitors are more likely to create efficiencies than mergers between unrelated businesses, both because there is a greater potential for eliminating duplicate facilities and because the management of the acquiring firm is more likely to understand the business of the target.

A concentration strategy usually has the advantage of low initial risk because the organization already has much of the knowledge and many of the resources necessary to compete in the marketplace. This strategy allows the organization to focus its attention on doing a small number of things extremely well.

The major drawback to a concentration strategy is that it places all or most of the organization's resources in the same basket. If sudden change occur in the industry, the organization can suffer significantly.