Page 137 - DCOM102_DMGT101_PRINCIPLES_AND_PRACTICES_OF_MANAGEMENT

Unit 7: Organising

7.6.1 Types of Integration Notes

Integration can be of two types that can be understood by the discussion as follows:
1. Horizontal integration: Horizontal integration is a strategy used by a business or
corporation that seeks to sell a type of product in numerous markets. This type of integration
occurs when a firm is being taken over by, or merged with, another firm which is in the
same industry and in the same stage of production as the merged firm.

Example: A car manufacturer merging with another car manufacturer.

In this case both the companies are in the same stage of production and also in the same
industry.
Horizontal integration allows the benefits of economies of scale, economies of scope,
economies of stocks and also that of having a strong presence in the reference market.
2. Vertical integration: Vertical integration unites a company through a hierarchy with a
common owner. Usually each member of the hierarchy produces a different product or
(market-specific) service, and the products combine to satisfy a common need. It is contrasted
with horizontal integration. Vertical integration may be of three types, viz., backward
(upstream) vertical integration, forward (downstream) vertical integration, and balanced
(horizontal) vertical integration.
(a) A company exhibits backward vertical integration when it controls subsidiaries
that produce some of the inputs used in the production of its products.

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. It was the main business approach
of Ford and other car companies in the 1920s, who sought to minimize costs by centralizing the
production of cars and car parts.
(b) A company tends toward forward vertical integration when it controls distribution
centers and retailers where its products are sold.
(c) Balanced vertical integration means a firm controls all of these components, from
raw materials to final delivery.
The three varieties noted are only abstractions; actual firms employ a wide variety of subtle
variations. Suppliers are often contractors, not legally owned subsidiaries. Still, a client may
effectively control a supplier if their contract solely assures the supplier's profitability.
Distribution and retail partnerships exhibit similarly wide ranges of complexity and
interdependence. In relatively open capitalist contexts, pure vertical integration by explicit
ownership is uncommon – and distributing ownership is commonly a strategy for distributing
risk.

Task Analyse and then enlist the integration examples of at least 4 companies,
the products of whom, you use in day- to-day life.

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