Below are some of the advantages of acquiring/merging with/cooperating with other companies:
- Access To New Markets And Customers: this should facilitate an increase in sales.
- Access To Complementary Resources: organisations can boost their own capabilities. For instance other businesses or partners may possess physical, financial or technical resources, expertise (market specific knowledge), complementary skills, supply chain relationships (for instance access to suppliers and distributors), or networks and contacts that enable firms to circumvent barriers to entry and compete more effectively.
- Economies Of Scope: firms may benefit from collaborations that will enable them to diversify their product range. Selling a greater range of products could attract new customers and consequently increase sales. Bundling products with those of complementary businesses (for instance a mobile phone manufacturer linking with an Internet service provider or the maker of popular mobile games) could also increase the value organisations can offer to customers.
- Efficiency: if organisations combine and enlarge their operations, this could enable them to buy, produce and sell in greater quantities, consequently giving rise to increased economies of scale and thus lower costs. Integrating into the supply chain (by acquiring or partnering with supply chain actors) could reduce external costs. In addition, combining knowledge, expertise and resources could enable firms to increase operational efficiency and thus reduce internal costs.
- Savings: companies could share costs such as infrastructure rent, marketing or research and development. Vertical integration can help to reduce costs.
- Reputation: organisations may influence others’ perceptions of their capabilities through gaining external legitimacy, which can in turn increase trust from suppliers, lenders and customers. Linking with an established organisation in a new market (for instance Tesco partnering with Tata in India) may reduce consumer suspicion, encouraging consumers to make purchases.
- Innovation: increasing access to resources and capabilities may foster innovation.
- Competition: forming alliances with, merging with, or acquiring other businesses reduces direct competition in the market. Vertical integration can increase a firm’s market power, which lessens its need to reduce prices in order to compete.
There are however issues that can arise when businesses combine/cooperate:
- Loss Of Control / Conflict: profits and decisions may have to be shared. Reaching an efficient consensus on decisions may be difficult if the motives or objectives of the parties involved do not align.
- Administration / Costs: coordinating and integrating different businesses can be a complex and thus costly procedure.
- Inefficiency: communication issues may arise if an organisation becomes more complex. In addition, multiple alliances with similar partners may yield fewer benefits than partnerships with differentiated partners.
- Expropriation: a larger, more powerful company may steal customers, expertise, assets or processes and then terminate the agreement. Ensuring intellectual property rights are sufficiently protected can mitigate this risk.
Vertical Integration
This involves a business taking control of additional steps in the chain of production and/or distribution with a view to reducing costs, saving time and/or improving efficiency. Backward integration involves a business taking control of one or more of the stages of production that typically occur before that business starts working on the product. For instance, a computer manufacturer may acquire (or set up) a microchip manufacturing business so that it no longer has to pay a premium to a microchip supplier in order to attain microchips that it requires to build a functioning computer. Forward integration involves a business taking control of one or more of the stages of production that occur after that business has finished working on the product. For instance, a computer manufacturer may operate an online store so that it can sell/distribute its own products, rather than charging a lower price to a separate retailer to sell the computers on its behalf. Business can either acquire other businesses in order to vertically integrate, or try to expand its own operations to cover the roles of suppliers/distributors etc. However, this may not always be a viable option, as a supplier may benefit from expertise and economics of scale that another business simply cannot achieve (unless it acquires that supplier).
Horizontal Integration
This involves a business taking control of other businesses operating within the same stage of the value chain in similar or different industries. This can enable firms to share resources (boosting economics of scale), increase production capacity, reduce competition and expand into foreign markets. For instance, if Internet Provider A took over Internet Provider B, the combined company would have a greater reach and a larger customer base that the two individual companies, whilst enjoying reduced competition within the market (as one of the competitors is no longer competing).
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By Jake Schogger - City Career Series