Concentration of Companies

Definition of Concentration

  • Concentration is a process that leads to:

    • An increase in the size of companies (capital, investment).

    • A decrease in the number of companies in a sector or branch of activity.

Explanation of Concentration

  • The process involves increasing the size of companies and reducing the number of companies in the market.

  • Example: If the market has companies X, Y, A, Z, and B, each producing different products (e.g., X produces pens, Y produces markers), concentration occurs when company X buys out companies B, taking over their production. This increases the size of company X and reduces the number of companies in the market.

  • The number of remaining companies can vary (three, two, etc.) based on the capacity of the acquiring company.

Causes of Concentration

  • Two main categories: Internal and External causes.

Internal Causes

  • Diversification Strategy:

    • Companies may choose to diversify their products. For example, a company producing pens may start producing markers, erasers, and other stationery items.

  • Excess Liquidity:

    • Companies with surplus capital may invest in new projects or production lines.

  • Company Ambition:

    • Companies may aim for growth through strategy, investments, workforce expansion, or technology.

  • Market Opening:

    • The opening of international markets encourages company concentration.

  • Intensification of Competition:

    • Increased competition among companies is also a cause of concentration.

Forms of Concentration

  • Horizontal Concentration

  • Vertical Concentration

  • Conglomerate Concentration

Horizontal Concentration

  • Involves the grouping of companies with similar activities, replacing competition with collaboration.

    • The new entity becomes stronger in the market.

  • Example: Companies producing similar products (e.g., pens) come together.

  • Objective: To eliminate competition.

Vertical Concentration

  • Grouping of companies with complementary activities in the production cycle.

    • Companies extend their activities upstream (buying suppliers) or downstream (buying distributors, wholesalers, points of sale).

  • Involves moving from upstream (raw material procurement) to downstream (distribution of the final product).

  • Example: A car manufacturer buys companies that supply raw materials such as cables, tires, and seats.

  • Objectives:

    • Reduce costs.

    • Become independent in terms of raw materials.

    • Have a free hand in strategy.

Conglomerate Concentration

  • Involves diversification into productions that are unrelated to each other.

    • Corresponds to a diversification strategy.

  • The company undertakes activities that are heterogeneous.

  • Example: A company producing pens may diversify into clothing and telephones.

  • Objective: To ensure a minimum level of profit.

Holding Companies (Société de Portefeuille)

  • Financial companies that hold shares in other companies.

  • Possess financial and managerial expertise.

  • Optimize investments for their shareholders.

  • Role:

    • Primarily financial; providing liquidity for new investments.

Consequences of Concentration

  • Economic and Social consequences.

Economic Consequences

  • Facing Competition:

    • Companies must be able to face competition.

  • Decrease in Production Costs:

    • Concentration can lead to lower production costs.

  • Innovation, Research, and Development:

    • Companies can invest more in research and development.

  • Risk of Monopoly:

    • A negative consequence where a company becomes dominant in the market.

Social Consequences

  • Job Creation:

    • Increase in company size may lead to job creation.

  • Risk of Unemployment:

    • Reduction in the number of companies may lead to job losses, especially during restructuring.

  • Deterioration of Purchasing Power:

    • Prices may increase due to reduced competition.