Types of Integration

What is vertical integration?

It is when one firm takes over or merges with another business at a different stage in the production process but within the same industry.

What is horizontal integration?

It is when a firm merges or takes over a rival competitor within the same industry

What is conglomerate integration?

It is where a firm diversifies into new markets unrelated to their current area of expertise

What is an example of forwards vertical integration?

The sometimes controversial US brand American Apparel has total control over all aspects of manufacturing and retail by operating its own chain of stores.

What are the benefits of forward vertical integration?

• Tighter control over the retail image.

• Better relationship with customers

• Increased market power

• Expert staff in stores.

What are the drawbacks of forwards vertical integration?

• Expensive strategy.

• Loss of focus away from their main area of expertise.

• Very different cultures in retail to manufacturing.

What is backward vertical integration?

It is when a business buys a supplier for their product.

What are the benefits of backwards vertical integration?

• Tighter control over quality of supply.

• Ability to lower prices to customers through cheaper supply costs.

• Create a USP

What are the drawbacks of backwards vertical integration?

• Less supplier competition could mean inefficiency.

• Less flexibility in the choice of supplier.

• Risk of limited management
  experience in new areas.

What is horizontal integration?

It is when a business buys a rival competitor in the same industry

What is an example of horizontal integration?

When the British car manufacturer Rover was taken over by the German BMW group many hoped for a revival of the firm's fortunes. Four years later the company was sold for just £10! Not all mergers and takeovers are successful.

What are the benefits of horizontal integration?

• Opportunities for large economies of scale.

• Less competition.

• Greater market power and higher profits.

What are the drawbacks of horizontal integration?

• Risk investigation by the Competition & Markets Authority if market share is over 25%.

• Cultural clashes

• Expensive

What is conglomerate integration?

It is when a business expands into markets totally unrelated to its own area of expertise.

What is an example of conglomerate integration?

Firms might wish to diversify into new markets and to spread their exposure to risk. Companies such as Samsung, Google, General Motors and Tata are specialists in diversifying into many unrelated markets.

What are the benefits of conglomerate integration?

• Opens up access to new markets.

• Asset stripping opportunities

• Spreads risk

• Enables rapid growth

What are the drawbacks of conglomerate integration?

• Expensive

• High risk (Ansoff)

• Limited experience

• Extensive market research

• Most likely to fail.