Skip to main content

Types of business integration

Integration 

There are different ways in which two companies can merge/be acquired. 

Vertical integration 

Merger or takeover between firms at different production stages in the same industry. 
Can be:

Forward (towards customer)
Company being acquired is closer to the consumer 
e.g. Fuller's brewery acquiring a pub. 
Backward (away from customer)
Company being acquired is further away from the consumer  
e.g. Fuller's brewery buying a hops farm. 

Generally:

Forward = raw materials -> production/manufacturing -> retail to consumers
And backwards = retail -> production/manufacturing -> raw materials 

Advantages: 

There is more control over supply (e.g. with the hops farm), reducing risk. Less subject to market forces (e.g. changes in the price of oil wouldn't matter as much if you had your own supply of oil) 

Diversification again reduces risk as if one venture fails, another might succeed. 

Cost control, control over prices, and a greater level of market control/power. 

Disadvantages:

Upfront costs - you have to pay a premium. There is a chance a firm isn't worth what you thought it would be. 

Different skillset- the merger/takeover may not work. The further from the core competencies of the original company, the greater the risk and the company would be less familiar with the new acquisition's market. 

If integration turns out to be difficult, costs may actually increase. 

Horizontal integration 

Merger/takeover between two firms in the same industry at the same stage of production. 

e.g. Facebook and Instagram 

Advantages: 

Not as risky, as the original company is not moving away from its core competencies, so is familiar with the industry and stage of production. 

Buying up competitors means market share increases, and more market power. 

Can be cheaper than building up the brand organically. 

Disadvantages:


Labels:

Comments

Post a Comment

Popular posts from this blog

Business Growth

Why do businesses grow?  Profit motive Businesses grow to make more profit by increasing revenue. Selling more to more people often means profits increase.  The valuation of a company's share is often influenced by how it is expected to do in the future (ie how much profit it is likely to make). When it is projected to do well, share prices increase, and it is valued more highly on the stock market. This provides incentive for companies to increase profits, doing well on the stock market increases investment and raises more money.  Cost motive - economies of scale When firms are larger, relative costs are smaller. This is because some costs are fixed, so if you are a larger company, producing larger output, the cost per unit will decrease.  e.g. If a T-shirt factory's main cost is the £10,000 to rent to factory each month, and it produces only 1000 shirts a month, each shirt costs £10 to make. But if it scales up and produces 100,000 shirts a month, ...
Post a Comment
Read more

The Philips curve

The Philips curve  The Philips curve suggests a tradeoff between unemployment and inflation - to decrease unemployment, inflation has to rise. This creates a conflict between two macroeconomic objectives - targeting inflation at 2% (in the UK) and decreasing unemployment. 
Post a Comment
Read more

3.1.3 Demergers

Demergers   A demerger is the breaking up of a firm into separate firms.  e.g Sports Direct selling off Dunlop in 2016. PepsiCo splitting off foods businesses (KFC, Taco Bell, etc.) into a separate corporation, Yum Brands. Later Yum Brands demerged into Yum China and Yum Brands. Reasons for demergers Diseconomies of scale - the opposite of economies of scale, where average costs begin to rise as output increases. May occur due to it being difficult to retain control on the expanding business - principal-agent problem may arise. Also less co-operation by employees who feel more alienated and as a result less productive - they feel less of a connection to the business.  May also be hard to co-ordinate and communicate between locations and employees when a firm is large. Miscommunication can again lead to costs rising.  To focus on core businesses to streamline costs and improve profits. The firm may have expanded into different markets and expe...
Post a Comment
Read more