Integration



Vertical integration  is the process of joining together of firms at different stages in the   production process (combination of up and down movement from extraction of raw materials to distribution of finished goods to consumer)  of a final product is known as vertical integration.  

There are two types of vertical integration, that it may take the form of 1) vertical integration forward or 2) vertical integration backward.
Vertical integration forward occur when a firm merges with or takes over marketing outlets which is engaged in the distribution of finished goods to consumer.

There are many specific motives / aims of vertical integration forward. Other than the major motives of all types of integration,[1) Achieve greater economies of scale, 2) achieve greater market share and 3) Greater security of business risks] they are;
1) Secure adequate number of marketing outlets,
2) rise in the standard of marketing outlets,
3) assure the product reach otherwise advertising would be a waste,
4) Prevent or react the squeezing out from market by competitors.

Vertical integration backward is the process of a firm integrating with another firm, which is engaged in the extraction of raw materials (merges with or takes over its suppliers).

There are many specific motives / aims of vertical integration backward. Other than the major motives of all types of integration, [1) Achieve greater economies of scale, 2) achieve greater market share and 3) Greater security of business risks] they are;
1) Greater control over the quality and regularity of its supply of raw material,
2) Assurance of supply of required quantity of raw materials
3) Restricting the availability of supply to competitors,  and 
4) Additional profit margin on raw materials itself.

There are problems also for vertical integration
1) There is a possibility of assets depreciation due to the development of superior substitute.
2) More over optimum size is different for different integrating firms, hence getting outside work for full capacity utilization is difficult.
 
Horizontal integration is the process of a firm integrating with another firm, which is engaged in production of the same kind or goods or service (or firms engaged in the same stage of production process).  
 There are many specific motives / aims of Horizontal integration.  Other than the major motives of all types of integration, [1) Achieve greater economies of scale, 2) achieve greater market share and 3) Greater securities of business risks] they are;
1) Reduce the competition so as to increase market share, 
2) Rationalization of industrial capacity of production,
3) enable greater degree of specialization,
4) Economies of large scale production.

There are problems also for horizontal integration
1) There is a chance for the integrated firm to become monopoly.
2) There are possibilities of management diseconomies of scale. 
 
Conglomerate (diversification) is defined as the merger which is neither a vertical integration nor a horizontal integration, which is the products of the firms are not directly related with one another 

There are many specific motives / aims of conglomerate (diversification). Other than the major motives of all types of integration, [1) Achieve greater economies of scale, 2) achieve greater market share and 3) Greater securities of business risks] they are;
1) Possibility of expansion beyond the growth in the market size of the existing product,
2) achieve the benefits arising from common raw materials, common technology or common markets,
3) Benefit of efficient use of available resources and
4) Managerial and financial economies of large scale production.   
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