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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