How a Business Grows and Succeeds

FIRM-

A firm is a kind of business, or partnership or any corporation. There are different types of many firms in the industry. They are private, public, nationalized firms

VERTICAL INTEGRATION-

When a company is expanding its business into areas that are at different points on the same production path, like when a manufacturer owns its supplier and/or distributor. It can also help companies reduce costs and improve efficiency by minimizing the transportation expenses and reducing turnaround time. However, sometimes it is more effective for a company to rely on the expertise and economies of scale of other vendors rather than be vertically integrated.

The degree to which a firm owns its upstream suppliers and its downstream buyers is referred to as vertical integration. Because it is having a significant impact on the business unit’s position in its industry with respect to cost, differentiation, and other issues, the vertical scope of a firm is an important consideration in corporate strategy.

Vertical Chain- The concept of vertical chain can be visualized using value chain. The two major issues considered while deciding whether to vertically integrate or not is cost and control. The cost aspect depends on the cost of transactions between firms vs. cost of administrating. The second main issue of concern is the impact of the assets control.

Benefit of Vertical Integration-

1. Improves supply chain coordination

2. Reduce transportation costs

3. Leads to expansion

4. Increase entry barriers to potential customers

Drawbacks of Vertical Integration-

1. Developing new competencies may compromise existing competencies

2. Decreased flexibility

3. Decreased ability to increase product variability.

Alternatives to Vertical Integration-

1. Franchise agreements

2. Joint ventures

3. Long term explicit contracts

When a company acquires its input supplier it is called backward integration. When it acquires companies in its distribution chain it is called forward integration. For example, a vertically integrated oil company may end up owning oilfields, refineries, tankers, trucks, and gas (petrol) filling stations.

HORIZONTAL INTEGRATION

Horizontal integration is used to finish competition between businesses and to maximize profit or create a monopoly. Horizontal integration is the opposite or reverse of vertical integration which is investing in natural resources used to manufacture the product instead of merging similar companies. Example of horizontal integration would be a business that normally manufactures televisions merging with another business that sells the same product, such as Zenith merging with Sony.

Advantages of horizontal integration-

1.Reduces Lowers the cost structure-

Creates increasing economies of scale

The duplication of resources between two companies

2. Increases product differentiation-

Product bundling – broader range at single combined price

Total solution – saving customers time and money