2. LESSON 6
Horizontal and Vertical Coordination
HORIZONTAL AND V
ERTICAL COORDINATION
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3. Objectives
• By the end of this lesson you must be able to;
– Describe horizontal and vertical integration
– Outline advantages and disadvantages of horizontal integration
– Outline advantages and disadvantages of vertical integration
– Explain alternatives to vertical integration.
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AAE 313: Agricultural Marketing
4. Defining Market Coordination
• Market coordination (integration) refers to the expansion of firms by
consolidating additional marketing functions and activities under a
single management.
• There are two types of market coordination and these are;
– Vertical coordination
– Horizontal coordination
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AAE 313: Agricultural Marketing
5. Horizontal Integration
• Horizontal Integration is the process of acquiring or merging with industry
competitors in an effort to achieve the competitive advantages that come
with large scale and scope.
• Staying inside a single industry allows a company to:
– Focus resources
• Its total managerial, technological, financial and functional resources
and capabilities are devoted to competing successfully in one area.
– ‘Stick to its knitting’
• Company stays focused on what it does best, rather than entering new
industries where its existing resources and capabilities add little value
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6. Horizontal Integration
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• Consolidation is characterized by higher Concentration Ratio (CR4) of firms.
• This concentration ratio compares the total market share of the top four firms
in a particular industry compared to the total market.
• When four firms control at least 40% of the market, it is no longer
competitive.
• This means, largest firms will have disproportionate influence on price,
quantity, quality of commodity and location of production.
• An example is in the tobacco industry in Malawi where a few tobacco
companies have the largest market share. These include, Alliance One, JTI
tobacco, Limbe Leaf, and Premium TAMA tobacco Company.
7. Benefits of Horizontal Integration
1. Lowers the cost structure due to economies of scale and reduced duplication
of resources between two companies
2. Increases product differentiation
o Product bundling – broader range at single combined price
o Total solution – saving customers time and money
o Cross-selling – leveraging established customer relationships
3. Replicates the business model in new market segments within same industry
4. Reduces industry rivalry through elimination of excess capacity in an industry
5. Increases bargaining power
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AAE 313: Agricultural Marketing
8. Problems with Horizontal Integration
• Implementing a horizontal integration is not an easy task and may lead to
diseconomies of scale.
• Differences in company cultures may cause conflicts
• High management turnover in the acquired company when the acquisition is
a hostile one
• Tendency of managers to overestimate the benefits to be had in the merger
• Tendency of managers to underestimate the problems involved in merging
their operations
• The merger may be blocked if merger is perceived to create a dominant
competitor or too much industry consolidation or have the potential for
future abuse of market power
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9. Vertical Integration: Entering New Industries
• Vertical integration involves linking firms at more than one stage of the
food chain, such as upstream suppliers or downstream buyers.
• A company expands its operations backward into industries that
produces inputs to its products or forward into industries that utilize,
distribute or sell it products.
• Examples include Pick and Pay stores in South Africa. They produce and
market most of their products.
• In Malawi, cold storage rare cattle and produces beef and sausages
while Central Poultry is in broiler production and feed manufacturing.
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10. Vertical Integration: Entering New Industries
• Backward Vertical Integration: Company expands its operations into an
industry that produces inputs to the company’s products.
• Forward Vertical Integration: Company expands into an industry that uses,
distributes, or sells the company’s products.
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11. Vertical Integration: Entering New Industries
• Full Integration: Company produces all of a particular input
from its own operations. It may also dispose of all of its
completed products through its own outlets.
• Taper Integration: In addition to company-owned suppliers,
the company will also use other suppliers for inputs or
independent outlets in addition to company-owned outlets.
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13. Advantages of Vertical Merger
• The firm not subject to losing control of supply. e.g. they can’t be held to
ransom by suppliers demanding higher price at a critical time.
• May benefit from some overlap of technology and expertise. Expertise in
broiler may help in production of better feed.
• Results in improved scheduling because of control over supplies.
• Reduced disruptions in quality and quantity products.
• Creation of new profit centres
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14. Problems with Vertical Integration
• It is costly to engage in vertical integration.
• May delay economies of scale as production is at different levels.
• Vertical integration requires companies to get involved in new aspects of
the supply chain where they are usually unfamiliar.
• Reduces flexibility and choice
• Problems of communication and coordination may arise.
• Creates confusion because business partners think that they are working
with one company when they are actually dufferent companies uner the
same management.
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15. Alternatives to Vertical Integration
• Apart from vertical integration a firm may reap same benefits
by making use of;
– Strategic alliances
– Strategic outsourcing
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16. Strategic Alliances
• These are long-term agreement between two or more companies to
jointly develop new products or processes that benefit all companies
concerned.
• Short-term contracts and competitive bidding may signal a company’s
lack of commitment to its supplier
• Strategic alliances and long-term contracting can enable creation of
a stable long-term relationship
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17. Strategic Outsourcing
• Strategic Outsourcing allows one or more of a company’s value-chain
activities or functions to be performed by independent specialized
companies that focus all their skills and knowledge on just one kind of
activity.
• Company chooses to focus on a fewer number of value-creation activities
in order to strengthen its business model
• It identifies noncore or nonstrategic activities in order to determine if they
can be performed more effectively and efficiently by independent
specialized companies
• Virtual Corporation describes companies that have pursued extensive
strategic outsourcing
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