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Running a business in a comparative market can be difficult. Businesses need to maintain their competitive edge to stay in business. They need to find ways to increase their market power while minimizing losses.
One way businesses can achieve these goals is through horizontal integration. It is a simple yet effective strategy in which business entities operating within the same industry join forces to increase their production of goods and services.
What is Horizontal Integration?
Horizontal integration is a strategy employed by businesses to acquire or merge with companies that are operating at the same level of the value chain in the same industry.
This strategy can create economies of scale and reduce costs, as well as increase market power and customer base. Horizontal integration can also provide access to new technologies and resources that would otherwise be unavailable to the business.
In simple words, a business entity expands its operations by taking over competing firms in the same industry. The purpose of horizontal integration is to increase market power, gain access to new sources of revenue, reduce costs, and improve operational efficiency.
How Horizontal Integration Works
Horizontal integration is the process of purchasing, merging, or acquiring companies that are at the same stage in the production chain and within the same industry. The idea behind horizontal integration is to increase control over a specific market or area of production.
For example, if a company manufactures chocolate products, it might merge with another chocolate-manufacturing company to increase production and market share. As a result, it would have more control over raw materials and production costs, as well as access to new markets.
Horizontal integration also allows businesses to gain access to new resources, technologies, and customers. By merging with or acquiring another firm in the same industry, a company can expand its operations and reduce the cost of production.
Benefits of Horizontal Integration
Horizontal integration brings several benefits to businesses, here are some of the main ones
- Larger market share
One of the main benefits of horizontal integration is that it allows businesses to increase their market share.
By merging or acquiring competitors, businesses can increase their customer base and access new markets. This can lead to an increased bottom line for the business.
- Access to a larger customer base
Since merging or acquiring other businesses in the same industry will increase a business’s customer base, it can also lead to increased revenue. This is because the business can now access more customers and generate greater sales.
- Access to necessary resources at a lower cost
By merging with or acquiring other businesses in the same industry, a business can gain access to resources such as raw materials and production methods at a lower cost.
This gives the business an edge over its competitors as it will be able to produce goods and services more efficiently, leading to increased profits.
- Increased revenue
More customers mean more revenue – and horizontal integration can help businesses achieve this goal. This makes sense as a larger customer base means more potential customers and more sales opportunities.
By merging with other businesses, a business can also increase its bargaining power, allowing it to negotiate better deals and better pricing for its products and services.
- Increased efficiency in production
It only makes sense that a business that is operating in the same industry as another will be able to produce goods and services more efficiently. By pooling resources, businesses can also reduce duplication of efforts and waste of resources.
This improved efficiency in production leads to cost savings and increased profits for the business.
Drawbacks of Horizontal Integration
Despite its many potential benefits, there are also some drawbacks to horizontal integration.
- Increased competition
- Reduced flexibility
- Difficult to manage
- High costs
Despite the drawbacks, horizontal integration is still a viable business strategy for those looking to expand their operations and gain a competitive edge in the marketplace. By carefully considering all the pros and cons of such a move, businesses can profit from the increased market share and efficiency that horizontal integration can provide.
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