Horizontal Integration Strategies

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Table of Contents

Introduction
Benefits
Challenges and Risks
Conclusion
References

Introduction

The Grand Met has grown tremendously by applying horizontal integration strategies in several industry sectors. Horizontal integration refers to the acquisition of companies that are operating at the same stage of the production marketing stage whether in the local or international region. When a company gets involved in horizontal integration, there are certain competitive advantages that it wants to achieve when it comes to economies of scale and scope (Phadtare, 2011, pp.101)

Benefits

In the food and drinks industry, the aim of the company was to cut costs and build the global brands. It built an international brand by acquiring companies both in the UK and other countries. It aimed to control the distribution of the drinks and also release new products into the market.

At first the company invested in hotel acquisitions. In 1947 and 1950, the company acquired the Mandeville and Mount Royal hotel respectively in the United Kingdom. Later the company acquired hotels in United States of America, Switzerland, Spain and France.

The company acquired hotels, pubs and restaurants where drinks and food was being sold. It acquired the Levy and Franks Company in 1966 which had several Chef and Brewer pub restaurants. By acquiring these competitive firms, the company was increasing its market share and the number of customers it would be serving.

It would now be able to influence the supply and the demand of the different products. The company has reduced the level of rivalry it was facing in the market. It has also increased its bargaining power when it coma to the customers and the suppliers of inputs (Gaughan, 2001, pp. 157).

In 1986, the company acquired the Heublein Company in the United States.

Heublein Company owned 13% of the market of the spirits market. Secondly, the company owned the world’s leading vodka brand, Smirnoff. The company increased its customer base by also purchasing companies that were related to the food and drinks industry. It purchased Express Dairy, a company that provided milk but also owned hotels, restaurants and food stores. Dance halls and casino groups were also acquired where they had food, drink and leisure operations.

One advantage of horizontal integration is that the company gains economies of scale. The company is able to spread its fixed costs over a wider customer base therefore reducing its average costs per units (Kazmi, 2008, pp. 152). There is also increased asset utilization when it comes to horizontal integration. The company is able to operate at the highest capacity (Anderson and Anderson, 2000, pp.171)

The company was also able to increase the range of products it was giving its customers.

The customers were able to buy food and drinks and at the same time enjoy hotel and casino or dancehall facilities. With the IDV acquisition of Grand Met the company was able to introduce to the market fifty five products that it had not been supplying previously. With the increase of its customer base it was able to boast of having 32% of the new products amongst the seven biggest drink companies in the region.

Horizontal integration also assists a company to expand geographically into other countries (Seth, 1990). In the 1970s, the company was facing a lot of financial pressure as the economic situation in the United Kingdom became tough. There was a secondary bank crisis and the property market collapsed.

The company also announced a decrease in the trading profits for the first time in the history of the company. Although the company survived the crisis by strengthening its brand in the market and cutting operational and staff costs, the management felt that it was time to diversify into international or foreign markets.

The foreign horizontal integration strategy began in the United States of America where the company bought Paddington Corporation which was the United States, IDV distributor. The company owned several related companies in the soft drinks, bottling and Alpo Dog Food industries. The company also purchased the Intercontinental hotels later on.

One of the major advantages of horizontal integration is that the company is able to focus on one area and build its strengths and capabilities (Pablo, 1994). It is able to invest its staff, financial and technical resources to create a niche in the hospitality business.

The Grand Met Company engaged in broader and diverse acquisitions such as child care operations, home health care services and optical companies that overstretched the staff and the resources of the company. Financial analysts were concerned with the decisions that the company was making. In acquisition strategies, the company should ensure that the target company is a strategic business fit (Shelton, 1988). The company appreciated this aspect later when the company was disposing those companies that were not performing well.

The CEO, Sheppard explained that the company decided to concentrate on its core activities of food, drinks and retailing. The management by this time had learnt that it was better to be a global leader in few businesses than to be command lesser presence in many companies.

The investment in other lines of businesses was straining the company and the management lacked the training and skills to coordinate all these diverse business interests well.

The challenges that the company was facing in the implementation of its horizontal integration strategies were evident as the company management undertook a series of steps to improve the financial performance. The Brewery workforce was cut by 50% and the company operations were separated from the pub-retailing business.

The Express company which was involved in milk distribution was performing badly so special attention was paid to its operations in order to improve its financial performance. The company was not able to provide the relevant expertise and attention to these diverse companies.

Challenges and Risks

There are however certain risks in horizontal integration especially when it comes to the foreign and even regional investments. First of all not all companies are interested in being acquired by other companies. Grand Met itself was hostile to the idea of being acquired when the company started facing operational challenges.

There were several bid rumours that had been circulating and the company was not interested. The Alan Bond Company in Australia was one of the interested predators. Grand Met itself also faced certain challenges when trying to acquire certain companies.

There are negotiation strategies and skills that the senior management should possess for the company to get what it wants. The Pillsbury acquisition proved to be quite a challenge to the company. There were many legal battles and American style bid strategies before the company could purchase it for $5.7 Billion. There are those deals that can be completed in a week such as the Intercontinental Hotels acquisition however the management should be equipped with the right skills and resilience in case things go in an unexpected manner.

The success of the acquisition strategy will depend on how the parent company handles the challenges and risks that arise after the acquisition (Loderer and Martin, 1992). The head office or the parent company should have sufficient supervisory and financial control over the affairs of the subsidiary. There should be sufficient control from the head office.

The controls in place should not be extensive especially when it comes to related companies however there needs to be controls (Chatterjee, 1986). Certain company operations should be centralised in order for the company to be efficient and effective. Otherwise the managers in the subsidiaries will do what they want without notifying the head office. By the time the parent company knows what has happened, the situation has spun out of control and the consequences are dire (Adler and Borys, 1996).

For horizontal integration to succeed the acquired companies have to be brought to the point where they replicate the business model of the parent company (Hill and Jones, 2008, pp. 288). The acquiring company should also be careful to ensure that there is coherence and organizational flow after every acquisition. If there is any organizational ineffectiveness, the market may react leading to lower share market prices (Franks, Harris and Titman 1991)

Another challenge for the company in horizontal integration is the duplication of work or roles in the different companies. Previously, the company had been forced to cut the staff costs due to low financial performance however the management chose to learn from this experience. When the company purchased the Pillsbury for

$5.7Billion, it went ahead and started aligning the operations of the acquisition. First of all, 1,500 staffs were laid off. A third of the company’s managers were also dismissed.

The acquiring company has to be careful however when it comes to the decisions of human or social capital (Walsh, 1988). There are those managers and staffs that the company cannot afford to lose. There are advantages to be gained by allowing the management of the acquired company to continue working in the firm. The parent company management needs to learn about the strengths, weaknesses, opportunities and threats of the acquired company.

They need to learn the corporate culture and the formal and informal operations of the firm. The extent to which the managers of the acquired firm will be laid off is dependent on the financial performance of the parent company (Walsh and Ellwood, 1991). The Grand Met Company dismissed a lot of the senior managers because of its shaky financial performance at that time.

In horizontal integration, the company is involved in both acquisitions and disposal activities. There are those companies that the company acquires which are facing challenges like the Pillsbury Company. The parent company may feel that it has the capability and resources to improve the performance of the company (Bruton, Oviatt and White, 1994).

The Pillsbury Company had a fast food segment known as Burger King which was facing a lot of challenges when it came to market dominance and market presence. The McDonald Company was proving to be quite a tough opponent. Grand Met also subjected all the other Pillsbury operations under intense scrutiny. The excessive costs were eliminated. A Grand Met senior official explained that the parent company introduced more pace, energy and a tougher approach in management in order to improve the company operations.

The company also explored the underexploited brands of the company and made them a source of strategic advantage. There was also the development of new food products and new markets.

As times goes by, the company should divest those acquisitions or product lines that are not performing well (Anand and Singh, 1997). In Grand Met, it came to the point where the company got involved in activities that came to be known as “Operation Declutter”.

This is where Sheppard, as the senior manager decided that the company would sell those companies that did not have a strong brand or market presence. If it was perceived that if in the future, the company did not offer any great promise or potential to perform better and act as a source of strategic advantage, Grand Met would go ahead and dispose the company.

Conclusion

There is increased corporate performance after acquisitions (Healy, Palepu and Ruback, 1992). The Grand Met Company has proven that there are numerous advantages to be gained when a company buys similar companies in different locations. Its strategy of reducing costs, improving the operations and building the brands worked to make it a global leader in the market place.

The company has learnt quite a lot in the whole process over the years. The management has learnt that the benefits and the advantages of horizontal integration are maximised when the company chooses one line of operations or stage in the production and concentrates on it. Too much diversification stretches the financial, technical and staff resources of the company.

References

Adler P. and Borys B. (1996). Two types of bureaucracy: enabling and coercive. Administrative Science Quarterly, 41: pp. 61-89.

Anand, J. and Singh, H. (1997). Assets redeployment, acquisition and corporate strategies in declining industries. Strategic Management Journal, 18 (Summer Special Issue): pp. 99-118.

Anderson, A. and Anderson, D. (2000). Gateways to the Global Economy. United States: Edward Elgar Publishing Limited.

Bruton, G., Oviatt B. and White M., (1994). Performance of acquisitions of distressed firms. Academy of management journal. 37: pp. 972-989.

Chatterjee, S. (1986). Types of synergy and economic value: the impact of Acquisitions on merging and rival firms. Strategic Management Journal, 7: pp. 119-139.

Franks, J., Harris R. and Titman S. (1991). The post-merger share price performance of acquiring firms. Journal of Financial Economics, 29: pp. 81-96

Gaughan, P. (2001). Mergers, Acquisitions and Corporate Restructurings. New Jersey: John Wiley & Sons.

Healy, P., Palepu K. and Ruback, R. (1992). Does corporate performance improve after mergers? Journal of Financial Economics, 31: pp. 135-175.

Hill, C. and Jones, G. (2008). Strategic Management Theory: An Integrated Approach. United States of America: Cengage Learning Inc.

Kazmi, A. (2008).Strategic Management and Business Policy. New Delhi: McGraw Publishing Co.

Loderer, C. and Martin K. (1992). Post-acquisition performance of acquiring firms. Financial Management, Autumn: pp. 69-79.

Pablo, A. (1994). Determinants of acquisition integration level: a decision-making perspective. Academy of Management Journal, 37(4): pp. 803-836.

Phadtare, M. (2011). Strategic Management Concepts and Cases. New Delhi: PHI Learning Private Limited.

Seth, A. (1990). Sources of value creation in acquisitions: an empirical investigation. Strategic Management Journal, 11: pp. 431-446

Shelton, L. (1988). Strategic business fits and corporate acquisitions: empirical evidence. Strategic Management Journal, 9(3): pp. 279-88.

Walsh, J. (1988). Top Management Turnover Following Acquisitions. Strategic Management Journal, 9(2): pp. 173 – 183.

Walsh J. and Ellwood. J. (1991). Mergers, acquisitions and the pruning of managerial deadwood. Strategic Management Journal, 12(3): pp. 201-217

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