Methods of Integration and Company Types

Methods of Integration

1. Horizontal Integration

  • Definition: Combination of two or more firms producing similar commodities at the same stage of production.
  • Examples:
    • Newspaper industries: The Guardian Post and Cameroon Tribune.
    • Brewery industries: Guinness SA and Brasseries du Cameroun.
a. Advantages of Horizontal Integration
  • Market Domination: Firms dominate the market and control the supply of the product.
  • Economies of Scale: Firms enjoy economies of scale.
  • Increased Financial Power: Enables firms to increase the range of their products.
  • Rationalization: Identify weak and inefficient industries, potentially leading to closures.
  • Specialization: High level of specialization and division of labor, focusing on particular processes.
b. Disadvantages of Horizontal Integration
  • Consumer Exploitation: Firms may become monopolies, charging higher prices.
  • Managerial Diseconomies of Scale: Higher number of workers and increased output may lead to inefficiencies.
  • Social Costs: Problems related to large-scale production and other social costs may arise.
  • Unemployment: Rationalization may lead to unemployment.

2. Vertical Integration

  • Definition: Combination of two or more firms producing similar goods at different stages of production.
  • Types:
    • Forward Vertical Integration
    • Backward Vertical Integration
a. Forward Vertical Integration
  • Definition: Movement of firms towards the market outlet.
  • Example: Oil company SONARA merges with petrol station Tradex.
Advantages of Forward Vertical Integration
  • Secure Market Outlets: To ensure an adequate number of market outlets.
  • Capture Market Share: Avoid being forced out of the market by competition.
  • Facilitate Introduction: Ease the introduction of firms and new products in the market.
  • Reduce Advertising Costs: Decrease the advertising cost of the market.
Disadvantages of Forward Vertical Integration
  • Diseconomies of Scale: May lead to managerial problems.
  • Monopoly Growth: May encourage the growth of monopoly, potentially exploiting consumers through high prices.
  • Substitute Risks: Discovery of artificial substitutes may decrease demand for natural raw materials. For example, the development of synthetic rubber replacing natural rubber.
b. Backward Vertical Integration
  • Definition: Movement of the firm towards the source of raw materials.
  • Examples:
    • Textile industry CICAM takes over a cotton industry like SODECOTTON.
    • Sugar company NOSUCA takes over a sugar cane plantation.
Advantages of Backward Vertical Integration
  • Steady Supply: Ensures a steady supply of raw materials, potentially excluding competitors.
  • Stable Prices: To ensure a stable price of the product.
  • Economies of Scale: Achieve economies of scale, both internally and externally.
  • Balanced Growth: Ensure balanced growth at various stages of the production process.
Disadvantages of Backward Vertical Integration
  • Substitute Risks: Raw material may become useless if a superior substitute is developed.
  • Price Drop Risk: The firm might make a loss if the price of the raw material falls.
  • Management Problems: The firm may become too large, leading to management problems.
  • Lost Opportunities: Firms may miss opportunities to benefit from lower raw material prices.

3. Conglomerate (Diversified Integration)

  • Definition: Merging of two or more firms that are not related to each other.
  • Example: Shoe company BATA merges with a cigarette company like SITABAC.
a. Advantages of Conglomerate Integration
  • Risk Reduction: Risk is reduced due to diversification, i.e., the production of more than one good.
  • Wider Market: The firm will secure a wider market.
  • Economies of Scale: The firm will enjoy economies of scale.
b. Disadvantages of Conglomerate Integration
  • Diseconomies of Scale: May occur, leading to management problems.
  • Monopoly Risk: The firm might become a monopoly, and consumers might be exploited through high prices.

4. Lateral Integration

  • Definition: Merging of two or more firms that are related to each other.
  • Example: A firm producing ROLEX watches merging with another firm producing calculators like CASIO.

Diagram Interpretation:

  • A: Backward vertical integration, where a car firm merges with an iron and steel firm.
  • B: Conglomerate integration, where a car firm merges with a cement firm.
  • C: Forward vertical integration, where a car firm merges with a garage chain.
  • D: Horizontal integration

Other Types of Companies

  • Holding Companies: A company owns more than 51% of the shares of another company, granting control over the other company.
  • Cartel Companies: Associations of firms that produce the same product. Example: OPEC (Organization of Petroleum Exporting Countries).
  • Pool: An association of firms that come together to control the price of goods and their output.
  • Trust: Merging of firms in different lines of business but controlled by one firm.