Business Integration

Vertical and Horizontal Business Integration

Vertical and Horizontal Business Integration

Introduction

Business integration is basically the integration of all the business operations. 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. Organizations 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 (Ornelas, Turner, 2008).

Discussion

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 . 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. But if the major share of sales value is produced internally in one's organization, integration is high (Aghion et.al, 2006).

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. Vertical integration in a company is closely related to the concepts of outsourcing and make-or-buy analysis (Palich, Cardinal, 2000).

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. 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 specialized companies with their core business in electronic production (Hart,Holmstrom ,2010).

Types of Vertical Integration

Full integration

A company that is fully integrated back into a given input can meet all the needs of input requirements internally. On the other hand, if a company is fully integrated forward and is able to meet the demand for a product with its own resources, becoming a self-sufficient enterprise. All this allows a fully integrated enterprise has full control of their assets.

Quasi - integration

Quasi companies - do not have the total integrated control of all assets in their value chains. They are forced to resort to means to ensure stable relationships, either ...