Define and differniate between vertical integration and horizontal integration?
Vertical Integration:- It describes a style of management control. Vertically integrated companies in a supply chain are united through a common owner. Usually, each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need. It is contrasted with horizontal integration. Vertical integration is one method of avoiding the hold-up problem.
A monopoly produced through vertical integration is called a vertical monopoly, although it might be more appropriate to speak of this as some form of the cartel.
Two types of vertical integration:- Backward Vertical integration is when it controls subsidiaries that produce some of the inputs used in the production of its products. For example, an automobile company may own
...a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure consistent quality in their final product. Forward Vertical integration when it controls distribution centers and retailers where its products are sold.
Horizontal Integration:- It describes a type of ownership and control. It is a strategy used by a business or corporation that seeks to sell a type of product in numerous markets. Horizontal integration in marketing is much more common than vertical integration is in production. Horizontal integration occurs when a firm is being taken over by, or merged with, another firm that is in the same industry and in the same stage of production as the merged firm, e. . a car manufacturer merging with another car manufacturer. In this case, both the companies are in the same stage of production and
also in the same industry. This process is also known as a "buy out" or "take-over". The goal of Horizontal integration is to consolidate like companies and monopolize an industry. Horizontal integration allows: Economies of scale Economies of scope Difference between horizontal integration and vertical integration?
Horizontal integration differs from vertical integration in regard to the following:
- Nature: Under horizontal combination, units carrying on the same trade or activity join together. They operate at the same stage in the industry but in the case of vertical combination, units operate at different stages of the manufacture of a product.
- Elimination of Competition: The horizontal combination eliminates competition among the units so combined. But it is not so in vertical integration as the combined units were not competing with each other.
- Control over Market: Horizontal combination may lead to full control of a monopoly. But it is not so in the case of vertical combination.
- Sell-sufficiency: Horizontal combination does not lead to the self-sufficiency of materials. But in vertical integration, the manufacturer of a product may integrate with the supplier of raw material. This will lead to self-sufficiency.
- Inter-dependency: The combined units under horizontal combination are not interdependent as far as raw materials are concerned. All units operate as semi-autonomous units. The stoppage of work in one unit doesn't affect the working of others.
But in the case of vertical integration, there is a combination of successive stages of production. Stoppage of work at one stage will affect the functioning at all subsequent stages. For instance, bread can't be prepared if the flour is not available. Flour can't be made available if wheat grains are not available.
References:
- http://en. wikipedia.
org/wiki/Vertical_integration
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