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Types of Integration
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A look at the advantages and disadvantages of horizontal and vertical integration along with conglomerate integration.
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Types of IntegrationHorizontal Integration:
The merger of companies at the same stage of production in the same or
different industries. The acquisition of additional business activities that are at the same
level of the value chain in similar or different industries. One example would be when a
company acquires competitors in the same industry doing the same stage of production.
Advantages Disadvantages
Economies of scale: Provide cost advantage to the companies Reduction in competition may lead to anti-trust issues.
through expansion of their product output. When goods are This may arise as the consumer may believe that they are
produced in larger quantities, the average cost per unit setting high prices as they have removed competition
reduces, thus increasing the profitability of the company. from the market and can set whatever price they want,
Integrating horizontally provides the companies with broader leading to a lack of consumer trust.
access to different unreached markets, resulting in an increase
in demand of their product. Reaching to economies of scale by
horizontal integration can help a company to achieve cost
monopoly and eliminate competition from the market.
Integrating horizontally consolidates the industry and creates De-moralised staff: As certain staff may be at risk of
monopoly. This helps the companies to gain power in the losing their job, they may be de-moralised as they could
market, as well as dominate supplies and downstream channel lose their job at any moment. This results in a lower
members in terms of cost and quality. quality of output from staff.
Integrating horizontally helps a company to enter foreign Culture clashes within the two companies causes
markets directly. This reduces the cost of international employees to be less-efficient or despondent. This also
trade by allowing the company to both produce and sell the means the new staff will find it hard to adjust as
product in the foreign market. operations is carried out differently between the two
companies.
Vertical Integration:
1. Vertical Forward: When the business controls distribution centres and retailers where its
products are sold.
2. Vertical Backwards: When the business controls subsidiaries that produce some of the inputs
used in the production of its products. For example, an automobile company may own
a tire company, a glass company, and a metal company. Control of these three subsidiaries is
intended to create a stable supply of inputs and ensure a consistent quality in their final
product.
Advantages Disadvantages
Firm not subject to losing control of supply. E.g. they There is a risk of reducing your organisation’s
can’t be held to ransom by suppliers demanding higher flexibility product variety due to the demands of
price at critical time. Vertical integration enables internal development that results from integrating
manufacturers to gain greater control over the inputs to different tasks in your work process. The organisation
the production process. Integration also enables the now has more work, and that can lead to a lack of time
manufacturer to control the cost, quality and delivery for innovation which could be used to create more
times of components, raw materials and other supplies. variety in other products.
That level of control can increase efficiency throughout
the supply chain by coordinating ordering and production.
When a manufacturer merges with distributors or a retail If demand falls, the manufacturer may be forced to cut
chain, it aims to secure and control an outlet for its prices to maintain production output -- a move that
products. Vertical integration gives a manufacturer could damage profitability throughout the supply chain.
access to the distributors' existing customer base,
reducing marketing and customer acquisition costs.
Manufacturers that control access to critical components The company may also face antitrust legislation e.g.
or scarce raw materials through vertical integration can Competition Commission or the OFT if regulators
create barriers to market entry. By limiting believe that a merger distorts the market by reducing
competition, they can build a strong market position and competition and setting extortionate prices.
protect their customer base.
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