Marketing Becoming Familiar with Vertical and Horizontal Integration

Objectives Define horizontal integration n List and explain the advantages and disadvantages of horizontal integration n Define vertical integration n Explain the three types of vertical integration n List and explain the advantages and disadvantages of Vertical integration n

Define Horizontal Integration • Horizontal Integration is the addition of other business activities at the same level of the value chain • Examples: – The Standard Oil Company buying 40 refineries – An automobile manufacturer buying a sport utility vehicle manufacturer – A radio station that also owns a newspaper and magazine

Advantages of Horizontal Integration • Economics of scale: Selling more of the same product in different parts of the world • Economics of Scope: Sharing resources common to different products. “Synergies” • Increased Market Power • Reduction in cost

Disadvantages of Horizontal Integration • • • Costs Increased work load Increased Responsibilities Anti-trust issues Creating a monopoly

Define Vertical Integration n n is the degree to which a firm owns its upstream suppliers and its downstream buyers. Example: n Carnegie Steel Company owned mills where the steel was manufactured, mines where the iron ore was extracted, coal mines that supplied the coal, ships and railroads that transported the material, etc.

Three Types of Vertical Integration n Backward (upstream) vertical integration: this is when a company owns some of the subsidiaries that produce some of the inputs used in the production of its products. n n Forward vertical integration: this is when a company owns the subsidiaries that market the product. n n Eample: When and automobile company owns a tire company Example is an movie studio that also owns a chain of theaters Balanced Vertical Integration: is a company that sets up subsidiaries that supply them with inputs as well as market their product.

Advantages of Vertical Integration n n Reduce transportation cost Improve supply chain coordination More oppertunities to differeniate by means of increased control of inputs Capture upstream and downstream profits Increase entry barriers to potiental competitors

Disadvantages of Vertical Integration n n n Capacity balancing: Making sure that inputs will match ouputs at all levels Potentially higher cost due to the lack of supplier compition Decreased Flexability Developing new competencies may comprimise existing competencies Increase bureaucratic costs Monopolization of markets

Quiz l What is Horizontal Integration? l What are two advantages of horizontal integration? l What are two disadvantages of horizontal integration?

Quiz l Define Vertical Integration l What are three types of vertical integration and explain each. l What are 2 advantages of vertical integration? l What are 2 disadvantages of vertical integration?

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