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Horizontal integration examples of companies. Vertical integration in the world of technology

Vertical integration- the process of merging production stages, which helps to reduce transaction costs and speed up the entire production process.

Advantages of vertical integration:

Increasing the speed of production of goods due to optimization internal processes previously different enterprises

Reduced production costs (profit from steel production is now yours)

Reducing dependency on external environment(those enterprises that were external to you and on which you depended are now internal and you no longer depend on them)

Cons of vertical integration:

· Entry into new market(the steel market in our example) requires experience in that market, and you don't have it.

· Increasing dependence on the external environment (your steel plant also depends on its suppliers).

Decreased flexibility. If earlier you could choose among suppliers, and if you wish, you could completely abandon steel in favor of polymer materials, now you must also consider the needs of your steel mill.

Thus, if the sales market is growing and bullish, then vertical integration gives you a win. Because you can be more aggressive and saturate, saturate, saturate the market. Cons practically do not play a role, because everything is fine with everyone! But if there is a downturn in the market, why would you increase the production rate? You already have warehouses overstocked. But the problems of the steel factory will be like a stone around your neck.

Horizontal Integration- taking control or absorption of a firm located in the same industry and at the same stage of production as the acquiring firm.

Advantages of horizontal integration:

· Reducing costs by eliminating duplicate processes. For example, instead of 2 marketing centers, you can now keep 1

· Reduced costs due to the mass effect. Now we can ask for more discounts from steel producers because we started ordering more.

· Reduction of costs due to the exchange of experience. By combining your know-how and your neighbor's know-how, you can certainly save more.

Reduction of costs due to the reduction of competition.

Cons of horizontal integration:

Decreased level of diversification

Team dissatisfaction with change organizational structure enterprises. And OBS will definitely change, because at least you will throw out duplicate processes

Duration of integration processes

Conflicts in the distribution system

Distribution channel is a system consisting of channel participants - producers, intermediaries and consumers, who are interconnected by an exchange process to create benefits in time and place. To achieve this goal, the distribution system should be considered as something holistic. It is in the interest of each channel member to cooperate with other channel members, although in practice cooperation is often minimal. In reality, most of the participants work largely independently, and the goals of one participant may not coincide with the goals of another. Under such conditions, it is difficult, and sometimes simply unrealistic, for a channel participant to satisfy the requirements of all its suppliers and at the same time consumers. All this leads to the fact that between the participants of the channel there are more conflict relations than cooperation. Marketers must anticipate and understand the origins of channel conflict and seek to either eliminate or minimize them. But to achieve this, you need to understand how conflict arises.

There is two types of conflict in the distribution channel: vertical and horizontal. Vertical conflict arises between participants located at different levels of the distribution system, for example, between a manufacturer and a wholesaler, or between a wholesaler and a retailer. Each channel member performs certain functions and adheres to a certain behavior model. For example, a manufacturer expects a wholesaler to show a retailer the full range of its products. If this does not happen, a conflict arises. Horizontal conflict- this is a conflict between channel participants at the same level - two or more wholesalers or two or more retailers. Such a conflict can occur between intermediaries of the same type (for example, two competing supermarkets) or intermediaries of two different types(for example, between a department store and a discount store). In general, the second type of horizontal conflict is more common. There are several options for "quenching" conflicts. good option is cooperation, which most often stems from the ability of one channel participant to influence the behavior of others. In other words, from the power of one participant over others. Power is used to acquire control and thus strengthens cooperation. Channel members with this power are called channel captains. In most cases, the manufacturer is the captain. The second approach to conflict resolution in the distribution channel is to integrate channel participants into a single organization, called the vertical marketing system. Such a system functions more as a whole, rather than separate parts.. It can also achieve economies of scale. For example, channel members can share market research results, general programs accounting, the help of specialists in advertising. An example of such integration can be considered a franchise.

Direct Marketing

Direct Marketing(direct marketing, DM, from English direct marketing, DM) is a direct (in the absence of intermediate links) interactive interaction between the seller / manufacturer and the consumer in the process of selling a particular product. At the same time, the buyer is given the role not of a passive object of influence on the part of the communicator, but of an active and full participant in the business dialogue.

The intended response of the direct marketing communication is the direct purchase of the product. Thus, direct marketing can be considered in two main aspects. : On the one side- it is a means of establishing the planned relationship with the buyer; on the other side- this is the direct implementation of marketing operations, providing the necessary pre-sales service, etc. The latter approach allows us to consider DM as one of the forms of direct marketing (zero level distribution channel).

Direct marketing is currently one of the fastest growing areas not only marketing communications, but perhaps all marketing activities generally. According to some forecasts, in the coming years, the proportion of sales through direct marketing in the total sales will dramatically increase. It is expected that DM will seriously replace advertising as the main means of marketing communications between manufacturers and individual consumers.

Conventionally, the following main forms of direct marketing can be distinguished::

personal (personal) sale;

direct mail marketing;

catalog marketing;

telephone marketing;

telemarketing;

Internet marketing, use of computer communications as a communication channel

21. Methods for determining the base price

When determining base price both the manufacturer of goods and the wholesaler or retailer are faced with the task of identifying the price that is most acceptable to the buyer and that suits the seller.

When using pricing methods, cost oriented , the price of a product is determined as the sum of some costs of the enterprise and the corresponding additional value characterizing the profit from the sale of this product. The specified amount of costs may contain the full costs associated with the production and sale of this product, or part of them. A different approach may be to establishing the amount of profit. Considering these factors, the mark-up method, the method of providing a target return on capital, and the break-even analysis method are most often used to set the price of a product taking into account costs. When using the markup method, the base price of a product is usually determined as the sum of the unit cost of the product and some rate of return. As the sum of the cost of a unit of goods and the planned profit per unit of goods on the capital invested in production and sale, the base price is set when using the method of ensuring target income on invested capital. When using the break-even analysis method, the price is set on the basis of the analysis of the break-even chart, which makes it possible to identify the market equilibrium point and determine the corresponding price of the goods.

When pricing with demand oriented of paramount importance is the analysis of the relationship between supply and demand. This is supposed to be carried out using the main methods of this group, which include the method of perceived value, the method of flexible prices, setting prices at auctions (the method of competition), the method of exchange quotations. The perceived value method is one of the common methods for establishing a base price. Using it, the price manager determines the balance point between the perceived value of the product and the possible costs to the buyer due to the purchase and consumption of the product. The specified point determines the base price of the product. When using the flexible pricing method, the same product is sold to different buyers at different prices. Typically, enterprises establish price flexibility in space, price flexibility in time, price flexibility depending on the intended use of the product, and price flexibility depending on the location of the product.
The relationship between supply and demand is most fully manifested during auctions. The presence of a large number of buyers and a small number of sellers during the auction contributes to the formation of a higher price for the goods. This is also typical for stock exchanges, where the price is in the form of a stock quote. The latter are published two or three times a day and directly depend on the prevailing relationship between supply and demand. The value of stock quotes is constantly changing depending on the prevailing market conditions.
Setting prices With focus on the level of competition , enterprises attach paramount importance to taking into account the price level of similar products offered by competitors. Most often they use the current price method and tender pricing methods. When using the current price method, an enterprise, focusing on the price level of competitors, can set the price for its product equal to, slightly lower or slightly higher than the price level of similar products available on the market. The most complete consideration of the level of competition when establishing a chain is provided in the conditions of holding competitions (tenders) for the supply of relevant goods or the performance of certain work packages. The main goal of such tenders is to attract as many competitors as possible to participate in the competition for the right to conclude the relevant contract in order to ensure the supply of a given product or the performance of a certain set of works under lowest cost and compliance with certain time and quality indicators.
Existing Methods pricing related to different groups should not be considered as alternative. Moreover, the justification of the price in real conditions predetermines for the most part the need to simultaneously analyze the level of the price, taking into account the costs, the prevailing relationship between supply and demand, the existing competition, and then refine it taking into account the influence of these factors. At the same time, cost analysis allows you to set a lower price limit. Analysis of the ratio of supply and demand makes it possible to identify the upper limit of the price. And, finally, the analysis of the prices of competitors' goods allows you to more accurately approach the real base price of the goods.
By setting a base price for your product , the manufacturer, for the most part, cannot control the level of prices set for this product by intermediaries. As a rule, wholesale and retail trade enterprises independently determine wholesale and retail prices. By wholesale prices sell their goods in the order of the wholesale turnover of various wholesalers as well as commodity producers. At retail prices, goods are sold in retail trading network both the population and various enterprises and organizations. The established wholesale and retail prices should compensate for all the costs associated with the activities of these enterprises and ensure that they receive the necessary profit. Therefore, both the wholesaler and the retailer add some margin to their costs, depending on the type of product.

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Introduction

The concept of integration appeared relatively recently, initially it was considered as the unification of people and especially states into a kind of socio-political community.

But already in the 50-60s of the XX, the concept of "integration" began to be widely used - first to reflect the processes taking place at the level of interethnic formations and blocs (for example, the integration of countries of the capitalist or socialist camp), and later under the influence of the trend towards a universal economic integration, it was moved to the level of organizations. Here it is interpreted as a combination of efforts of a number of organizations to achieve a common strategic goal, strengthen their competitiveness and increase efficiency.

Now you can find the following definitions of the concept of "Integration":

Unification of economic entities, deepening of their interaction, development of ties between them. It manifests itself in the expansion and deepening of production and technological ties, the sharing of resources, the pooling of capital, the creation of favorable conditions for each other to implement economic activity, removal of mutual barriers ;

Merging of reproduction processes, scientific cooperation, the formation of close economic, scientific, industrial and trade ties;

The process of developing deep and stable relationships, resulting in the merging of reproduction processes, scientific cooperation, the formation of close economic, scientific, industrial and trade ties;

In the "Big Encyclopedic Dictionary" integration (lat. integer - whole) is interpreted as replenishment, restoration (a concept meaning the state of connectedness of individual parts and their functions into a whole);

In spite of external differences the above definitions, each of them has the concept of "connection". It is used in the sense of mutual dependence, conditionality, connection, fastening, splicing of parts into a whole. From this we can conclude that integration is a process that means the state of connectedness of individual elements of the system into a single whole. To form your own definition of the concept of "integration", it is necessary to highlight the characteristic features of integration that will allow separating this process from all other processes of associations that exist in the economy.

Significant signs of integration:

a) integration is a union (where a union is the formation of a whole from separate independent parts, units) through the formation of various types of links between subjects, manifested in a different combination of their resources;

b) integration is the union of two or more subjects;

c) integration is the unification of previously independent and independent economic entities that previously had their own direction of self-development;

d) it follows from the above feature that integration is an association of economic entities that own property, which allows it to be united according to their will and decision;

e) the association of property always takes place on the basis of the conclusion of contracts, therefore integration is an association through the establishment of civil law relations;

f) sign (e), defining the conclusion of contractual relations, allows us to conclude that these relations are built, first of all, on a voluntary basis of the parties, therefore, we can say that integration is the association of subjects to achieve the goals of effective joint cooperation, which predetermines the voluntariness of this process.

After reading all these definitions, one can display a holistic concept of integration.

Integration is voluntary association two or more previously independent economic entities by establishing between them various types and forms of ties, stipulated by the conclusion of civil law acts, in order to implement effective joint cooperation for the benefit of each of the entities being merged.

This definition of the concept of "integration" distinguishes, first of all, that it allows us to attribute an association that has these characteristics, namely, to an integration process, and no other. The main difference of this definition is the emphasis on the voluntariness of the merger process.

1. Existinghorizontal integration

The concept, the essence of horizontal integration and the reasons why an enterprise goes to use this type of integration, we will consider in this paragraph term paper.

Horizontal integration is the unification of enterprises, the establishment of close interaction between them "horizontally", taking into account joint activities enterprises producing homogeneous products and using similar technologies.

Example: You make cars and your neighbors make cars. After horizontal integration, there is only 1 firm producing both those and other cars.

Figure 1.1 - System structure with horizontal integration

Figure 1 shows the structure of the action of horizontal integration, judging by it, it can be understood that material flows come from the management company, and the firms that are absorbed by it transfer these flows to the market segment (groups of consumers with common preferences), receive financial flows in return, and transfer them to the management company. Information flows are transmitted to all participants.

The merger of enterprises through horizontal integration has both pros and cons:

Table 1. Pros and cons of horizontal integration

Horizontal Integration

1) Reducing costs by eliminating duplicate processes. For example, instead of 2 marketing centers, you can now keep 1.	1) Reducing the level of diversification.
2) Cost reduction due to the mass effect. Now we can ask for more discounts from steel producers because we started ordering more.	2) Dissatisfaction of the team with a change in the organizational structure of the enterprise.
3) Reducing costs through the exchange of experience. By combining your know-how and your neighbor's, you can certainly save more.	3) Duration of integration processes.

Table 1 shows that horizontal integration allows savings in the medium term, and in the short term it can lead to some decline in production. If the market has stabilized or is in decline, then horizontal acquisitions to reduce costs in the medium term.

There are a number of characteristic reasons that contribute to the choice of a horizontal integration strategy, among them we note the following:

1) horizontal integration may be associated with growth characteristics in the manufacturing industry (for example, rapid growth);

2) increased economies of scale as a result of the merger can enhance the main competitive advantages;

3) the organization may have an excess of financial and labor resources, which will allow it to manage an expanded company;

The essence of horizontal integration is that in conditions of market competition, many small firms cannot resist large firms, then they decide to unite with the same firm as they are and form a monopoly in order to resist competition and dictate their terms in the market for the good.

2 . WITHThe importance of vertical integration

Vertical integration - production and organizational association, merger, cooperation, interaction of enterprises connected by common participation in the production, sale, consumption of a single final product: suppliers of materials, manufacturers of components and parts, assemblers of the final product, sellers and consumers of the final product.

For example: in modern agriculture, such a chain exists. Collection of the product, its processing, sorting, packaging, storage, transportation and, finally, the sale of the product to the end consumer.

Figure 2 - System structure with vertical integration

Figure 2 shows the structure of a vertically integrated system. From it it is clear that Management Company supplies financial flows to P. 1 (which is at the beginning of the production process chain), which, in turn, transfers the material flows to P. 2 (which is at the second stage of the production chain) and so on increasing until the product reaches consumers. The consumer submits financial flows to the enterprise located at the end of the production chain, and the enterprise transfers them to the management company. In this structure information flows transferred to all participants in the production chain.

Vertical integration (VI) can have directions:

Vertical Integration Back - A company integrates backward vertically if it seeks to gain control over companies that produce the raw materials needed to produce that company's goods or services.

Vertical Forward Integration - A company pursues vertical integration forward if it seeks to gain control of companies that produce a product or service that is closer to the end point of the product or service being sold to the customer (or even a subsequent service or repair).

Balanced vertical integration - a company pursues balanced vertical integration if it seeks to gain control of all companies that provide the entire production chain from the extraction and / or production of raw materials to the point of direct sale to the consumer. In developed markets, there are effective market mechanisms that make this type of vertical integration redundant: there are market mechanisms for controlling subcontractors. However, in monopolistic or oligopolistic markets, companies often seek to build a complete vertically integrated holding.

Table 2 - Pros and cons of vertical integration

Vertical integration

1) Increasing the speed of production of goods by optimizing the internal processes of previously different enterprises.	1) Entering a new market requires experience in that market, and you don't have it.
2) Reducing the cost of production (the profit from production now remains with you).	2) Increasing dependence on the external environment (your acquired company also depends on its suppliers).
3) Reducing dependence on the external environment (enterprises that were external to you and on which you depended are now internal and you do not depend on them)	3) Decreased flexibility. If earlier you could choose among suppliers, and if you wish, refuse altogether, now you must also take into account the needs of your acquired enterprise.

Table 2 shows that if the sales market is growing, then vertical integration gives you a win. After all, you can conduct a more aggressive policy and saturate the market. Cons practically do not play a role, because everything is fine with everyone! But if there is a downturn in the market, why would you increase the production rate? You already have warehouses overstocked. But the problems of the steel factory will be like a stone around your neck.

In general, the essence of vertical integration is that there are many firms in the market that are suppliers to firms that need the benefits of this firm to produce their product. The supplier company understands that the buyer company depends on it and begins to dictate its prices. Therefore, the buyer firm decides to take over the supplier firm so that the entire production chain depends on it. After the acquisition, the supplier company is obliged to obey the management company, this helps to speed up the production time of the product and makes it possible to bear the lowest costs for the production of the good.

3 . Comparative characteristics of vertical and horizontalintegrations

horizontal vertical enterprise integration

Having considered horizontal and vertical integration, we can easily compare them with each other. To do this, we will create a table where we indicate: the pros and cons, why the company chooses this type of integration, dependence on acquired enterprises, the impact on production, and what this type of integration leads to.

Table 3. Comparative characteristics of vertical and horizontal integration

	Horizontal Integration	Vertical integration
Why businesses choose this type of takeover	In a competitive market, many small firms cannot compete with large firms.	speeds up the production time of the product and makes it possible to bear the lowest costs for the production of the good
	Cost reduction and high competitiveness	Reduce costs and increase production speed
	Duration of integration processes.	No experience in a new market, Decreased flexibility, Increased dependence on the external environment
Dependence of the management company on the acquired enterprises	Does not depend
Impact on production	Increases the amount of good produced	Accelerates the pace of production
What does it lead to	To the formation of a monopoly	Toward a sustainable production process

Table 3 shows comparative characteristics the impact of integration on enterprises. Comparing the pros and cons of horizontal and vertical integration, one can understand that both integrations are beneficial for enterprises, but the essential difference is that in horizontal integration the management company does not depend on the acquired companies, and in vertical integration the management company is entirely dependent on the companies it has taken over. The benefits of using one or another integration are also different, so we can safely say that for each enterprise, the choice of the type of integration depends on the situation in which the enterprise is located and on what result it expects.

Conducting a characterization of the types of integration, we can conclude that these two types of integration are absolute opposites to each other, they affect enterprises in different ways and lead to different results. From this it follows that each enterprise, choosing which type of integration to choose, pursues its own reasons and goals.

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Thus, such well-established industries as automotive, aircraft, oil, etc., provide an excellent opportunity to use all the “pluses” of vertical and horizontal integration. These industries have accounted for most of the mergers and acquisitions in recent years.

We must complete our consideration of the problem of the fundamental transformation of market relations into intracompany relations by analyzing the role of technological and other factors in this process, which will be the subject of the next part of the work.

2.2 THE CONCEPT OF HORIZONTAL INTEGRATION

Horizontal Integration- unification of enterprises, establishing close interaction between them “horizontally”, taking into account the joint activities of enterprises that produce homogeneous products and use similar technologies.

horizontal integration. Most typically, a horizontal integration strategy occurs when a firm acquires or merges with a major competitor or a company operating at a similar stage in the value chain. However, two organizations may have different market segments. Consolidation of market segments as a result of a merger gives the company new competitive advantages, and in the long run promises a significant increase in income. There are a number of characteristic reasons that contribute to the choice of a horizontal integration strategy, among them we note the following:
horizontal integration may be related to the growth characteristics of the manufacturing industry (eg, rapid growth);
increased economies of scale due to mergers can enhance core competitive advantages;
the organization may have an excess of financial and labor resources, which will allow it to manage an expanded company;
bundling can be a means of eliminating a close substitute product;
the competitor they want to buy may have a significant shortage of financial resources.

2.3 THE CONCEPT OF VERTICAL INTEGRATION

Vertical integration- production and organizational association, merger, cooperation, interaction of enterprises related by common participation in the production, sale, consumption of a single final product: suppliers of materials, manufacturers of components and parts, assemblers of the final product, sellers and consumers of the final product.

Vertical integration refers to that part of the added value that is produced under joint ownership. The price of the item being sold will most likely include the cost of materials, components, and systems. The high purchase price of these investments means a low level of integration. If the majority of total sales value is generated within a single organization, the level of integration will be high. The concept of horizontal integration is used much less frequently these days and refers to the use of a wide range of products in order to maximize customer satisfaction.

Vertical integration is the process of replacing market transactions with intra-corporate transactions, resulting in a planned economy in which suppliers enjoy a monopoly position and consumers simply have no other choice. Vertical integration, like diversification, was once very popular in the management of commercial organizations, but the peak of this popularity passed a few decades ago. A classic example is Singer, an American sewing machine company that at some point integrated all of its operations from primary sources of raw materials (forests and iron mines) to finished sewing machines.
Vertical integration in a company is closely related to outsourcing and make-or-buy analysis, and raises philosophical questions such as “Did Ronald Coase get Nobel Prize in 1992?" or “where does the company start and end, and why?”.
Experience shows that a low level of competition leads to a high level of integration, i.e. diversification. Those countries of the world where competition was at a low level experienced too much influence of the planned economy to be competitive in the modern world with its globalization. This led to a thorough review of the entire business chain and, as a result, consideration of the possibilities of outsourcing. As a result, traditional value chains were broken and new companies were created. At the same time, the performance of older companies was declining. The production of components and the supply of auxiliary systems in the telecommunications industry was outsourced to specialized companies whose main activity was the production of electronics.
Most industries are already in a phase of de-integration, where they produce fewer finished products themselves and buy more components from third-party suppliers.
In theory, all functions can be performed by individual companies. We can distinguish the computer department, factory, sales company and other parts of the management apparatus. The decision to vertically integrate essentially involves choosing between producing goods and/or services yourself or buying them from someone else.
Gradually, the shortcomings of advanced vertical integration came to light. The high level of vertical integration became a problem and an object of struggle for Mikhail Gorbachev in the Soviet Union, and this is a similar problem for all traditional airlines. The largest European companies have always been relatively free from the tensions of competition, and, accordingly, they were characterized by a high level of vertical integration. Competing with newcomers like Ryanair or Easy.Jet, the old companies have struggled not only with their cost structures, but also with advanced vertical integration. These companies did their own engine maintenance, cleaned their own aircraft, managed their own ground support and cargo handling services, etc., which of course led to a number of intermediary deals.
Centralized organizations are characterized by excessive faith in their own abilities, which is expressed in the desire to do everything on their own. In contrast, more entrepreneurial organizations tend to make the whole chain more efficient by purchasing the goods and services they need from other companies. The following are the negative features of advanced vertical integration:
1. It eliminates market forces, and with them the possibility of correcting unnecessary transactions.
2. It makes subsidies attractive, which distorts the picture of competition and distorts the question of the company's raison d'être.
3. It creates a deceptive sense of power that does not correspond to the realities of the free market.
4. It creates an interdependence that can lead to the collapse of any of the functions involved if one of them finds itself in a difficult situation.
5. The closed market it organizes (guaranteed distribution channels) lulls the company's vigilance and creates a false sense of security.
6. A false sense of security dulls the will and ability of an organization to compete.

Many examples of vertical integration are based on misconceptions and self-deception. The most common misconception is the belief in the possibility of eliminating competition in a single link in the production chain with the help of its control. Some of the illusions that prevail in the world of vertical integration are listed below:
- Illusion 1: a strong market position at one stage of production can be transformed into a strong position at another.
This assumption has often led to poor investment decisions in the activities of the Swedish Consumers' Cooperative* and other conglomerates, which have subsequently been affected by the above deficiencies.
- Illusion 2: business transactions that do not go beyond one firm exclude the participation of sales agents, simplify the management process and thus make transactions cheaper.
This is nothing less than the classic creed of all adherents of the planned economy, who consider centralized control to be the only right way, and the free market as worthy of anathema.
- Illusion 3: We can resurrect a strategically weak unit by buying out the unit that follows it in the production chain, or the unit that precedes it.
This is possible in rare cases. The logic of each industry must be judged by its own indicators. This rule applies here as well, with the exception of situations of diversification in order to spread risks.
- Illusion 4: Industry knowledge can be used to gain competitive advantage in both upstream and downstream operations.
It is worth taking a closer look at the potential benefits and making sure that this logic does not mislead the pass.
There are many examples of amazing profitability gains achieved by breaking down vertically integrated structures. Perhaps it is for this reason commercial organizations generally moving towards a lesser level of integration. Car manufacturers with their own supply chains do not supply their cars to export markets at a lower cost than those using independent supply companies. They also make their own gearboxes at no less cost than the companies specializing in the production of gearboxes.
One of the reasons why vertical integration was so popular in the technocratic era is the obvious economies of scale that were tangible and measurable, as opposed to the benefits of small scale, such as entrepreneurial spirit and competitive energy, that cannot be quantified.

In certain specific situations, vertical integration also has a positive side, especially when control of key resources allows achieving competitive advantages.
Some are listed below:
- higher level of coordination of operations with better control capabilities
- closer contact with end users due to vertical integration
- creating stable relationships
- access to technical know-how relevant to the industry
- confidence in the supply of necessary goods and services.
The integration of the travel company VingrevSor into the hospitality business through the creation of holiday villages in tourist resorts is an example of the growth from selling tours to holiday accommodation, a move that was seen as a likely strategic advantage.
SAS has also invested in hotels, and IKEA, with its backward integration from furniture sales to furniture design and production planning, is balanced by a forward integration that leaves the last stage of production (furniture assembly) to the consumer.
Vertical integration is often based on self-admiration or excessive pride, so it is worth carefully considering your own internal motives.
Tired of the look of the kitchen? Want to change something? order kitchens to order on individual orders.

This strategy means that the company expands in the areas of activity related to the promotion of goods on the market, its sale to the final buyer (direct vertical integration) and related to the supply of raw materials or services (reverse).
Direct vertical integration protects customers or the distribution network and guarantees product purchases. Reverse vertical integration is aimed at retaining suppliers who supply products at lower prices than competitors. Vertical integration also has a number of advantages and disadvantages, some of which are listed below.
Advantages:
There are new savings opportunities that can be realized. This includes better coordination and management, reduced handling and transportation costs, better use of space, capacity, easier collection of market information, reduced negotiations with suppliers, lower transaction costs, and the benefits of stable relationships.
Vertical integration should guarantee the organization of delivery within tighter deadlines and, conversely, the sale of its products during periods low demand.
It can give the company more room to participate in a differentiation strategy. This is because it controls a large part of the value chain, which can provide more room for differentiation.
This path allows you to resist the significant bargaining power of suppliers and buyers.
Vertical integration may allow a company to increase its overall return on investment if the proposed option offers a return greater than the company's opportunity cost of capital.
Vertical integration can have technological advantages in that the acquiring organization gains a better understanding of the technology, which can be fundamental to business success and competitive advantage.
Flaws:
Vertical integration tends to increase the proportion of fixed costs. This is due to the fact that the company must cover the fixed costs associated with backward or forward integration. The consequence of this increased operational dependency is that the enterprise's risk will be higher.
Vertical integration can lead to less flexibility in decision making due to changes in the external environment. This arises because the company's competitive advantage is related to the competitiveness of the suppliers or buyers included in the integration process.
It can also create significant barriers to exit, as it increases the degree of attachment of a company's assets. They will be much harder to sell in the event of a downturn.
There is a need to balance the initial and final stages of the main integration. Under integration understood...

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Abstract >> Finance

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V economic theory there is the concept of integration. Integration is a process of development of sustainable relations between neighboring states, leading to their gradual economic merger, based on the implementation by these countries of a coordinated interstate economy and policy. Distinguish between horizontal and vertical integration.

Horizontal integration is accompanied by the acquisition by one firm of others engaged in the same business. A variation of horizontal integration is diversification, which means bringing together firms whose technological processes are in no way connected (for example, the production of chemical fibers and aircraft).

Vertical integration is a method by which a company creates (integrates) its own input or output stages of the technological chain. Integration can be complete (combining all inputs or outputs) or narrow (buying only part of the incoming elements by the company and producing the rest in-house).

A company using vertical integration is usually motivated by the desire to strengthen the competitive position of its key source business, which should be facilitated by: cost savings; departure from market value in integrated productions; improving the quality control of production and management processes; protection of own technology.

However, vertical integration also has negative sides: increased costs; inevitable financial losses due to rapid technology change and unpredictable demand.

Vertical integration can increase costs if the company uses its own input production in the presence of external low-cost sources of supply. This may also be due to the lack of competition within the company, which does not encourage its suppliers to reduce production costs. When technology changes, there is a risk of over-binding the company to outdated technology. With constant demand over high degree integration allows you to more securely protect and coordinate the production of products. When demand is unstable and unpredictable, such coordination in vertical integration is difficult, which increases the cost of management. In these circumstances, narrow integration may be less risky than full integration, as it reduces costs compared to full integration and, under certain conditions, allows the company to expand vertical integration. Although tight integration can reduce management costs, it cannot completely eliminate them, and this really limits the expansion of vertical integration.

It is all of the above that emphasizes the relevance of the chosen topic of the course work.

The purpose of this course work is the study of vertical integration. The objectives of this work are to find a definition of vertical integration, study the causes of vertical integration, consider vertical restrictions and mergers, and study this topic at the present stage.

For the production of any kind of product, it is necessary to carry out a series of stages, each of which includes a sequence of technological stages. For example, it is necessary to explore raw materials, extract raw materials, deliver them to the place of processing, process them into intermediate and then final products, distribute them and deliver them to the consumer.

Vertical integration is the combination of two or more of these stages of production. Theoretically, it can include all stages - for example, from the extraction of raw materials to the distribution of the final product among manufacturers. In this case, all transformations of the product at each of the stages must be internal within the firm. On fig. 1 shows the elements and options for vertical integration. The sequence of technological operations T 1 - T Q characterizes the completed production cycle, which includes the sequence production stages E 1 - Em, the growth of value added goes from the initial to the final operation, and it rises to the product output of the production process. If at each stage the product is produced by a sole firm, then there is no vertical integration, and each subsequent stage is realized through an open market transaction.

In reality, almost every firm has several intermediate stages of integration, i.e. carries out a certain sequence of technological redistributions, combining them with the purchase of input resources from other firms. In the product flow, they can integrate upstream (lagging) or downstream (leading).

In the activities of non-integrated firms, products pass from one stage to another with the help of market transactions based on free market prices. In integrated firms, the internal transfer of products from stage to stage is carried out at internal (conditional) transfer prices, which do not require equivalence to market prices and completely depend on the internal interests and strategy of the company. In this regard, it is necessary to note the reasons for choosing the integration of stages, since:

Market transactions can ensure close, efficient and controlled contacts and strict ownership;

Highly representative control in integration can be efficient, authoritative, and relatively inexpensive.

The question of the scope of vertical integration and its very expediency is a complex issue of theory and practice, which is still largely debatable. In particular, the connection between integration and monopoly forces remains at the core of disputes.

Economists of the Chicago UCLA School tend to argue that integration cannot transform monopoly forces from one level to another, cannot create greater market forces than exist at horizontal levels. Other opinions are that integration, on the contrary, generates a deal, excludes the market, and therefore can eliminate the competition of sellers for access to resources. In this regard, it is important to note the actualization of the problem of the possibility of both determining and measuring the level (value) of integration, as well as the reasons why firms use this process.

From the point of view of measuring the level of vertical integration, intuitive simplicity rests on the measurement technique itself. It is possible to count the number of stages with broad integration, but there is uncertainty in the definition of the very concept of "stage" - it can include many individual relatively independent stages. For example, in the electronics industry, the preparation processes integrated circuits include 2.5-3 thousand technological stages(transitions), which are sometimes quite difficult to separate into separate stages. Alternatively, a measure of a firm's value added to its final sales income can be used as an index of the degree of integration of these firms. An integrated producer adds value through many stages, so its performance will be high. For example, the value added indicator of a retailer will be low. At the same time, there are examples of other polarities - brick production is single-stage and has a high added value, while multi-stage industries have a low added value. The value added indicator may be lower for industries that are ahead in the production chain (raw materials, processing).

Some of technical efficiency are physical - for example, in metallurgical production, thermal resources can be saved when iron is smelted and ingots are made and processed while maintaining a heated state. (Heat can be used for heating water, heating greenhouses and farms, etc.).

Savings and efficiency can also be obtained by increasing the level of organization, better coordination and interpenetration technological processes that exclude additional costs and risks, as well as adherence to clear schedules and regulatory procedures.

Vertical integration is when a company controls more than one stage of the supply chain. It is a process that businesses use to turn raw materials into a product and bring it to the consumer. There are four stages in the supply chain: goods, production, distribution, and retail.

There are two types of vertical integration.

Forward integration is when a company at the beginning of a supply chain controls stages further down. Examples include iron mining companies that own "downstream" activities such as steel mills. Backward integration is when a business at the end of a supply chain carries out "upstream" activities. For example, when a movie distributor like Netflix also produces the content.

An example of vertical integration is a store like Target which has its own store brands. He owns production, controls distribution and is retailer. Because it cuts out the middleman, it can offer a brand-name-like product at a much lower price.

Producers can also integrate vertically. Many shoe and clothing companies have a flagship store that sells a wider range of products than you can get from a regular retailer. Many also have stores that sell last season's merchandise at a discount.

Five Benefits

Any one of the five benefits of vertical integration gives a company a competitive advantage over non-integrated companies. Consumers are more likely to choose their products or services. Either the costs are lower, the quality is better, or the product adapts directly to them.

The first advantage is that the company does not have to rely on suppliers.

They are less likely to encounter violations from those who do not work. They can avoid frequent strikes and labor disputes from companies located in socialist countries.

Second, companies enjoy vertical integration when their suppliers have great bargaining power and can dictate the terms. This is important if one of the suppliers has a monopoly. If a company can bypass these suppliers, there are many benefits. It can reduce internal costs and improve the delivery of needed items. It is less likely that it will not have critical elements.

Third, vertical integration gives the company economies of scale. That's when the size of the business allows you to cut costs. For example, he can lower the cost per unit by buying in bulk. Another way is to make the production process more efficient. Vertically integrated companies eliminate overhead costs through management consolidation.

Fourth, the vertically integrated retailer knows what sells well. He can knock out the most popular branded products. That's when he copies the ingredients or manufacturing process. It creates similar, but branded, marketing messages and packaging. Only powerful retailers can do this. This is because brand manufacturers cannot claim copyright infringement.

They don't want to risk losing distribution through the retailer.

The fifth benefit is the most obvious one for consumers. These are low prices. A vertically integrated company can reduce costs. He can pass on these savings to the consumer as more low prices. Examples include Best Buy, Walmart, and most national grocery store brands.

Four disadvantages

The biggest disadvantage of vertical integration is expense. Companies must invest a lot of capital to build or buy factories. They then have to keep the plant running to maintain efficiency and profits.

This reduces flexibility. Vertically integrated companies cannot follow consumer trends that take them away from their factories. They also cannot change factories to countries with a lower exchange rate.

The third problem is the loss of focus.

For example, for a successful retail business it takes a different set of skills than a profitable factory. It's hard to find a CEO that's good for both.

It is also unlikely that any company will have a culture that supports both Retail Stores and factories. A successful retailer involves marketing and sales. This culture does not meet the needs of the factories. A clash of cultures can lead to misunderstandings, conflict, and lost productivity. A non-integrated company may even use cultural diversity in the workplace to compete with a vertically integrated one.