The term corporate concentration is also used as concentration in the economy and describes a situation in which external growth of companies is achieved through mergers with other companies. The resulting advantages can lead to economic efficiency gains. Concentrations can be achieved, for example, by buying up companies or creating entirely new groups.
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Horizontal corporate concentration
The horizontal company concentration arises between companies that are located at the same production or economic level. This could be, for example, a company concentration between different coal mines or an amalgamation of different automobile manufacturers.
But trading companies can also enter into this corporate concentration. The advantages for the company lie in the cost savings and the favorable use of synergies as well as the unit cost degression.
Vertical corporate concentration
The vertical corporate concentration, in turn, exists between different companies that occupy upstream and downstream production or economic levels.
This can be a corporate concentration that then takes place between the coal mine and the steel mill where the steel mill gets the coal from the coal mine. This is the so-called supplier principle, which results in savings in transaction costs. The advantages for the company lie in cost savings within procurement as well as, of course, in securing sales through regular customers.
Conglomerate corporate concentration
Another type of merger of companies is the so-called conglomerate company concentration. This concentration is a takeover that takes place with companies from outside the industry. The conglomerate concentration of companies is given when, for example, a freight forwarding company is taken over or bought up by an oil company. The conglomerate concentration of companies results in conglomerates from different companies from completely different industries.
advantages and disadvantages
advantages - The advantages of merging two companies are that large numbers of items can be produced, which in turn results in cost savings. This means that lower prices and higher wages can be implemented.
Further advantages lie in possible new production processes and innovations, because otherwise smaller companies often do not have the financial means for research. Economic downturns can be better absorbed and redundancies are not absolutely necessary, even in smaller companies.
The merger can bring about economic growth as well as learning effects from one another, and credit can be obtained more easily through larger product ranges. The merger strengthens the position and in financial distress larger companies are more likely to receive subsidies.
disadvantage - It can be disadvantageous that a large company exploits its position in its own favor. The customer's position can be weakened. Competition can be brought to its knees by corporate concentration via dumping prices. Jobs may be lost, as duplication of positions is created through concentration. If necessary, the companies can overestimate the synergy effects, which leads to lower profits.