Hindle (2008) stated “Horizontal Integration relates to the merger of firms at the same stage of production in the value chain, in the same or different industries…”
In a business model the value chain refers to the value added at each stage of a product or services construction or implementation as it develops from raw materials or concept to completion. The value added at each stage in the chain is greater than the development costs incurred. Accordingly, manufacturers and retailers form different parts of the value chain.
Our business in CESIM is mobile phones and within the simulation we are able to manufacture market and add value to a product by paying for R&D (research and development). This is a vertically integrated company, unfortunately, we are unable to pursue a horizontal integration strategy of M&A (mergers and acquisitions) with competitors in the same sector or expand by developing tablets or wearables like smart watches.
We had the resources to pursue M&A., consequently, we may have benefited from:
• Economies of scale and scope.
• Increased market share/power.
• Reduced operating costs and competition.
• Greater product differentiation.
• Shared resources.
However, as Julian M (2002) points out “For effective horizontal integration, managers have to connect the companies knowledge bases, build social relationships amongst people and shape a shared sense of identity.” Failure to recognise this results in high management turnover and culture clashes. Antitrust legislation and loss of flexibility in larger companies can also prove problematic.
Thus, when expected synergies fail to materialise the consequences can be severe. A KPMG study of 700 acquisitions concluded that only 1 in 3 were beneficial. Hopefully, H.I. would have been our key to success.