Critically Evaluate the Main Potential Advantages and Disadvantages of Horizontal Expansion for a Company.
Which way to grow?
The question is, should the company expand horizontally or should the company diversify or expand vertically? There is no clear cut answer to this question. There are advantages and pitfalls to each of these methods and there are many examples of organisation where a certain choice has proven extremely profitable and vice versa. This essay will provide advantages and disadvantages of horizontal expansion by comparing it with vertical and diversified growth. The reader will be presented with the facts and at the end will be allowed to make his own decision. One major deciding factor on growth strategy will be the organisations long term strategy and the behaviour of the Markets, and its competitors.
Horizontal expansion as well as other forms, can occur in a number of methods, this includes firm spending its own profits to expand its business or by acquisitions and mergers with companies operating in the same stage of the vertical production chain. This can be in the same market or in markets in other countries for example the takeover of O2 by a Spanish company called Telephonica. This strategy of expansion is useful when the firms’ main objective is to increase sales by producing and distributing more of the firms existing products, the advantage is that the company can exploit economies of scale, reducing overheads and expenses. But each company will have a limit to its economies of scale before it starts to experience diseconomies of scale. The company will become too large and this will make it ridged and inflexible to changes in customer demands and market conditions.
If the company expands through merger and acquisitions, the competitive pressure will be reduced as their will be one less rival in the market. This will increase the firms control over the market and could provide a competitive edge. However the disadvantage of this option is that the firm has “all its eggs in one basket” and if the market declines or demand falls the
The question is, should the company expand horizontally or should the company diversify or expand vertically? There is no clear cut answer to this question. There are advantages and pitfalls to each of these methods and there are many examples of organisation where a certain choice has proven extremely profitable and vice versa. This essay will provide advantages and disadvantages of horizontal expansion by comparing it with vertical and diversified growth. The reader will be presented with the facts and at the end will be allowed to make his own decision. One major deciding factor on growth strategy will be the organisations long term strategy and the behaviour of the Markets, and its competitors.
Horizontal expansion as well as other forms, can occur in a number of methods, this includes firm spending its own profits to expand its business or by acquisitions and mergers with companies operating in the same stage of the vertical production chain. This can be in the same market or in markets in other countries for example the takeover of O2 by a Spanish company called Telephonica. This strategy of expansion is useful when the firms’ main objective is to increase sales by producing and distributing more of the firms existing products, the advantage is that the company can exploit economies of scale, reducing overheads and expenses. But each company will have a limit to its economies of scale before it starts to experience diseconomies of scale. The company will become too large and this will make it ridged and inflexible to changes in customer demands and market conditions.
If the company expands through merger and acquisitions, the competitive pressure will be reduced as their will be one less rival in the market. This will increase the firms control over the market and could provide a competitive edge. However the disadvantage of this option is that the firm has “all its eggs in one basket” and if the market declines or demand falls the
Bibliography: Lowes, Bryan (Ed/s Pass, C. L., Sanderson, Stuart). 1994. Companies and markets : understanding business strategy and the market environment. .Blackwell Besanko, David. 2004. Economics of strategy. .3rd edition. John Wiley. Lipczynski, John (Ed/s Wilson, John O. S., Goddard, John). 2005. Industrial organization: competition, strategy, policy. .2nd edition. Pearson Education.