Horizontal Boundaries of the Firm

1
Horizontal Boundaries of the Firm

• Chapter 2 Concepts
• Dean Foods Company
• Examples and Discussion
• By
• Jack Arizcuren
• Jon Shadle
• Oriana Olson
• Derek Groppetti

2
What are Horizontal Boundaries

• Identifies the quantities and varieties of
  products and services a firm produces.
• The expansion of a company by purchase or
  acquisition of similar products or services

3
Horizontal vs.Vertical Integration

• Horizontal is the production of a different
  product, using the same inputs. Doesnt cross
  the value chain barrier.
• Vertical integration is when a manufacture
  expands upstream or downstream in the production
  chain, changing the quality of a product.

4
Examples of Horizontal Integration

• Standard Oil Companies acquisition of 40
  refineries
• Ford Automobile acquisition of Jaguar
• Media companies ownership of radio, television,
  newspapers, books, and magazines

5
Advantages of Horizontal Integration

• Economies of Scale
• Economies of Scope
• Increased Market Power
• Brand Name Recognition
• Diversification

6
What is Economies of Scale?

• Economies of Scale- achieved by selling more of
  the same product. This will make the average
  cost decline as output increases, but will
  eventually rise as production reaches capacity
  constraints.

7
What is Economies of Scope?

• Economies of Scope- achieved by sharing resources
  common to different products. By using common
  resources a firms savings will increase as the
  variety of goods or services increase.

8
The Four Major Sources of Scale and Scope
Economies

• Indivisibilities and the spreading of fixed cost
• Increased productivity of variable inputs
• Inventories
• The cube-square rule

9
Economies of Scope Scale

• Present whenever large-scale production,
  distribution, or retail processes have a cost
  advantage over smaller processes.
• They effect pricing and entry strategies.
• Not always available in some industries.

10
How do they differ?

• Scale deals with quantities of products or
  services
• Scope deals with the variety of products or
  services

11
Horizontal Integration Advantages Cont.

• Increased Market Power- over suppliers and
  downstream channel members
• Brand Name Recognition- customer. perception of a
  linkage between products.
• Diversification- less effected by industry swing

12
Disadvantages

• Beyond a certain size bigger is no longer better
• Anti- Trust issues can arise
• Difficult control

13
Dean Foods Company

• Is the Nations largest processor and distributor
  of milk and other dairy products
• Also a leader in soy foods and other specialty
  products
• Other acquisitions include Horizon Organic,
  Consolidated Container Company, and White Wave

14
Deans Foods Products

• Fresh milk and cream products
• Dairy-related beverages, juices, juice drinks and
  bottled water
• Ice Cream Novelties
• Yogurt, cottage cheese and sour cream
• Dips dressings
• Coffee creamers
• Soy products
• Pickles and specialty sauces

15
Suiza Foods Corporation History

• 88 purchase Reddy Ice, a commercial ice business
• 93expanded into dairy business with purchase of
  dairy in Puerto Rico
• 97 merger with Morningstar Group Inc. to expand
  value-added dairy products

16
Dean Foods History

• 1925 Samuel Dean Sr. start evaporated milk
  processing plant
• 1925-1961 Dean Foods experiences growth and
  economies of scale with purchases of additional
  plants
• 62 Enters the pickle industry

17
Dean Foods Company History

• December 21, 2001 The "new" Dean Foods is born
  when Suiza Foods Corporation's acquisition of
  Dean Foods Company is complete. Suiza changes its
  name to Dean Foods Company and its "ticker
  symbol" on the NYSE changes from "SZA" to "DF."
  The company's headquarters are located in Dallas.
  
• May 9, 2002 Dean Foods acquires Boulder,
  Colo.-based White Wave, Inc., maker of Silk, the
  nation's leading refrigerated soymilk.
• May 8, 2003 Dean announces realignment of
  organization to sharpen focus on strategic brands
  by creating the Dean Branded Products Group,
  which is responsible for marketing and selling
  Dean's nationally branded products. Morningstar
  Foods transfers all dairy manufacturing assets to
  Dean Dairy Group and changes name to Dean Branded
  Products Group.

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Result of Horizontal Integration

• DAIRY PROCESSORS
• Annual Sales
• 1. Dean Foods (Suiza Foods Corp). 9,260 Million
• 2. Kraft Foods (Philip Morris) 4,000 Million
• 3. Dairy Farmers of America 2,858 Million
• 4. Land OLakes 2,684 Million
• Source Dairy Foods Dairy Top 100 (2001)

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Benefits to Deans Food Company of Integration

• Strong market share on processed milk industry
• Acquisitions in organic and soy milk have created
  leverage in entire industry
• Acquisition of numerous brand name products such
  as Alta Dena and Land Lakes

20
Disadvantage of Dean Foods and Suiza Foods Merger

• The Justice Department told Suiza Foods Corp.
  and Dean Foods Corp. they must sell 11 plants in
  eight states to resolve antitrust issues related
  the 1.5 billion merger.
• Since milk is an American staple, The Justice
  Department wanted this product to continue to
  receive the benefits of competition.
• Source CNN Money

21
Sources

• www.cnnmoney.com
• www.deanfoods.com
• Dairy Foods Top 100
• Economies of Strategies
• Besanko, Dranove, Shanley
• www.quickmba.com