Question

How do firms use horizontal, vertical, and related types of acquisitions to increase their market power? Provide an example of a company that has used multiple types of acquisitions to increase its market power and describe how the firm is now a greater competitor in the market as a result. Cite any sources used to support your answer.

Answer 1

ANS :-

Horizontal vs. Vertical Integration: An Overview

Horizontal and vertical integrations are strategies used by businesses in the same industry or production process.

• A horizontal acquisition is a business strategy where one company takes over another that operates at the same level in an industry.
• Vertical integration involves the acquisition of business operations within the same production vertical.
• Horizontal integrations help companies expand in size, diversify product offerings, reduce competition, and expand into new markets.
• Vertical integrations can help boost profit and allow companies more immediate access to consumers.

Horizontal Integration

When a company wishes to grow through horizontal integration, its aim is to acquire a similar company in the same industry.Companies may choose to undergo horizontal integration in order to increase their size, diversify product or services offerings, achieve economies of scale, or reduce competition. They may also wish to gain access to new customers or markets, including overseas. For example, a department store may choose to merge with a similar one in another country to start operations overseas.The result of horizontal integration, when successful, is the ability to produce more revenue together compared to if they were to compete independently. In addition to this, a newly merged company can cut down on costs by sharing technology, marketing, research and development (R&D), production, and distribution.

Some examples of horizontal integration include:

• Marriott's 2016 acquisition of Starwood Hotels & Resorts Worldwide in the hospitality industry1
• Beer company Anheuser-Busch InBev's 2016 acquisition of competitor SABMiller2
• AstraZeneca's 2015 acquisition of ZS Pharma3
• Facebook's 2012 acquisition of Instagram4
• Disney's 2006 acquisition of Pixa

Vertical Integration

A company that undergoes vertical integration acquires a company that operates in the production process of the same industry. Some of the reasons why companies choose to integrate vertically include strengthening their supply chain, reducing production costs, capturing upstream or downstream profits, or accessing new distribution channels. To do this, one company acquires another that is either before or after it in the supply chain process.This strategy is important for many companies for several reasons. Not only does it increase profits from the newly acquired operations by selling its products directly to consumers, it also guarantees efficiencies in the production process, and cuts down on delays in delivery and transportation.

Companies can integrate vertically in two ways: backward or forward.

Backward integration occurs when a company decides to buy another company that makes an input product for the acquiring company's product. For example, a car manufacturer is undergoing a backward integration if it acquires a tire manufacturer. This ensures the manufacturer it has a steady supply of tires in order to keep making its cars.

Forward integration occurs when a company decides to take control of the post-production process. So that car manufacturer from the example above may acquire an automotive dealership through forward integration—the process of acquiring a business ahead of its own supply chain. This not only gets the manufacturer closer to the consumer, but it also gives the company more revenue.

Some examples of vertical integration include:

• Google's 2012 acquisition of smartphone producer Motorola6
• Ikea's 2015 purchase of forests in Romania to supply its own raw materials7
• Amazon's integration into hardware by producing Kindle Fire tablets