I am beginning the foundation work for, what I hope to become, a conglomerate in various industries (medical, real estate, multi-media, tech. to name a few). Could anyone provide arguments for vertical integration v.s. horizontal integration in growing a conglomerate? I understand that this is still a strongly debated topic with excellent examples of how both can succeed, but I am interested in your opinions.
Papers analyzing both methods would be welcomed.
Foe expansion of a conglomerate, both vertical and horizontal integration fits. However, selection of a particular route will depend on the corporate strategy. When product market is expanding, horizontal integration is required. However, if the supplies are increasing their cost, backward vertical integration may be preferred. In case distribution channels are becoming costlier or they are providing their space and services to competitors, forward vertical integration is desirable.
broadbasing market: Horizontal integration
becoming better competitive in niche are, having control on inputs or downstream products choose vertical integration ( backward and forward respectively).
If you must expand, you have to make a strategic choice. Market survey should help that.
If you are interested in the TMT sector, two seminal references to start with:
- Li, F., & Whalley, J. (2002). Deconstruction of the telecommunications industry: From value chains to value networks. Telecommunications Policy, 26(9/10), 451-472
- Ballon, P. (2009). The platformisation of the european mobile industry. Communications and Strategies, (75), 15-34
Hope it helps.
A deeper approach can also be found in these two books, among thousands of insightful works:
-Brandenburger, A, & Nalebuff, B. (1996). Co-opetition. New York: Doubleday Books (quite generic).
- Wu, T. (2011). The master switch: The rise and fall of information empires. Atlantic Books. (more media focused).
I think, it is useful to start by specifying the definition of the three concepts: vertical integration,, horizontal integration and the conglomerate. For this, I suggest you to look at these articles, free downloadable in internet.
- (Horizontal, Vertical, and Conglomerate FDI: Evidence from Cross Border Acquisitions, Nils Herger, and Steve McCorriston, 2014)
URL: http://business school.exeter.ac.uk/economics/papers/
- (Horizontal, vertical and conglomerate investments in the Italian logistics industry: drivers and strategies, Stefano Elia1, Elena Maggi 2, Ilaria Mariotti3)
Thank you all for the papers and opinions. It has been a very beneficial conversation so far.
Your corporate level strategy is very important in making your choice of direction of integration. Again, prevailing environmental conditions or factors that are likely to serve as opportunities or threat and at same time the required competencies that serve as strength to undertake any of the directions are important in choosing any.The critical concern for all such key success factors will objectively offer the premise for a strategic advantage.
Have you defined what business you are in? Is it a service business or a manufacturing business? Your decision on which of these sectors you are in should help you decide your corporate integration.
Basically, it is a matter of Corporate strategy and competitive scenario irrespective of which business are you in.
James Simons,
There is a diagnostic/research biomedical division; a real estate division; digital media division; metal recycling division; and a holdings division.
Thank you all for the answers. They have been helpful in clarifying some things for me.
Each division needs to develop its own strategy based on its strengths, weakness, opportunity and threat. The strategy development based on SWOT and PESTEL analysis will tell you which integration - vertical or horizontal - fits to which division.
HI,
Perhaps this paper may help you in a sense:
C Schneidetr O Spalt, "Conglomerate investment;, skewness, and (the CEO long-shot bias", Journal of Finance, April 2016, vol 71 , N°2, p 635-671.
Best regards
Generally, vertical integration would be preferable where you want to capture the value chain but when your objective is to increase market share, horizontal integration should be preferred.
Conglomerate is a thing consisting of a number of different and distinct parts or items that are grouped together. To have difference and distinct businesses one has to diversity, however, what you are looking at is the benefits of vertical integration over that of horizontal integration. Vertical integration would help an organization to become well established in that particular industry. It will help to penetrate the market well. Look at Lenovo as an example. My question is, can we compare vertical and horizontal integration in the first place?
Hi,
I changed my mind concerning the perspective of your question. A conglomerate is supposed to be a collection of companies involved in unrelated segment of the market. If you begin to undertake vertical or horizontal mergers, you change your strategy and want to focus on an specific industry or on a supply chain devoted to a specific product. It means that you are no more a collection of unrelated companies, but that you are looking for economies of scale, synergies, economies of scope, and that you are wanting to integrate your businesses together, or at least some of them.. For sure, market power is at stake and event studies of the stocks of the firms involved, but also of their rivals would be interesting to realize. I can remember some papers of Fee and Thomas (2004), or of F Shahrur (2005) on the topic. In general, these mergers will trigger others M&A deals in reaction on the markets.
Best regards.
I agree with the view point on conglomerate. However, units within the conglomerate can have strategy for vertical or horizontal integration.