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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:


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