BUSINESS INTEGRATION

Business Organisation and Policy

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Table of Contents

Introduction1

Vertical Integration1

Types of Vertical Integration2

Upstream Vertical Integration2

Downstream Vertical Integration3

Balanced Vertical Integration3

Benefits of Vertical Integration3

Investments in Specialised Area3

Product Quality4

Improved Scheduling4

Drawbacks of Vertical Integration4

Increased Cost Structure4

Technological Changes5

Unpredictable Demand5

Horizontal Integration5

Benefits of Horizontal Integration6

Lower Cost structure6

Increased Product Differentiation7

Industry Rivalry7

Increased Bargaining Power7

Drawbacks of Horizontal Integration8

Conglomerate Integration8

Critical Analysis9

Conclusion10

References11

Business Organisation and Policy

Introduction

Business integration refers to the alignment of strategies, objectives, processes, systems, technology infrastructure and the firms operations with the changing market and the customer needs. Organisations all over the world use different strategies and models of business integration in accordance with the nature of their business and market. Some of the widely implemented strategies include vertical Integration, horizontal integration and conglomerate structures. They have their own set of advantages and drawbacks. Numerous factors must be taken into account by the management when deciding upon the appropriate strategy of integration.

Vertical Integration

Vertical integration is the process of replacing market transactions by internal transactions, resulting in a planned economy in which suppliers enjoys a monopoly and consumers lack alternative choices (Herrigel 2004, p. 45). Vertical integration is an expression for the portion of value added that is produced within the framework of common ownership. If a product is sold, its price probably comprises the input costs of materials, components and systems. If the price of buying this input is high, integration is low (Hart, Holmstrom 2010, p. 488). But if the major share of sales value is produced internally in one's organization, integration is high.

Vertical integration, like diversification, was at one time the height of fashion in business management, although it passed its peak of popularity several decades ago. A classic example is Singer, the American sewing machine company, which at one time integrated its total operations from primary raw material sources (forests and iron mines) to finished sewing machines (Herrigel 2004, pp. 45). Vertical integration in a company is closely related to the concepts of outsourcing and make-or-buy analysis. Research indicates that low competitive pressure leads to a high level of integration, i.e. diversification. Those parts of the world where competitive pressure has proved to be low have thus seen too much planned economy for them to be competitive in the modern and globalised world (Herrigel 2004, p. 47). This has led to a discreet review of the entire business chain and consequent deliberations on outsourcing. As a result, traditional value chains are broken up and new companies are created, while, at the same time, the old ones have to reduce delivery capacity. For example, manufacture of components and supply of subsystems in the telecommunications industry have contract out to specialised companies with their core business in electronic production (Herrigel 2004, p. 47).

Types of Vertical Integration

The vertical integration is the extent to which an organisation possesses its downstream supply contractors and upstream purchasers (Ornelas, Turner 2008, p. 239). It can be categorised into three types.

Backwards vertical integration, which is also called upstream vertical integration

Forward vertical integration, which is also known as downstream vertical integration

3. Balanced vertical integration, which ...