2. Size of businesses Flashcards
Vertical integration
Vertical integration is a business strategy where a company expands its operations by acquiring or controlling other businesses that are either (upstream or downstream in the supply chain)
integrates different stages of production or distribution within the same industry under its ownership.
There are two types of vertical integration – backward and forward
Backward vertical integration
With backward vertical integration, a company acquires or takes control of businesses positioned (earlier) in the production or supply chain.
By doing so, the company aims to ensure a stable and reliable source of raw materials, reduce dependency on external suppliers, and achieve cost savings through (economies of scale).
For example, a car manufacturer may backward integrate by acquiring a steel manufacturer to secure a supply of steel for their car production.
Forward vertical integration
Forward vertical integration occurs when a company expands its operations by acquiring or controlling businesses that are closer to the end-consumer or the distribution side of the supply chain
Vertical integration (Advantages)
- Increased market power
- Enhanced control over distribution -> more control -> better brand reputation
- Profitability <- higher profit margins
Vertical integration (Disadvantages)
- Problems of communication and coordination within a bigger and more disparate firm -> diseconomies of scale
- Loss of the benefits of specialized expertise
- It may raise competition concerns, especially when a company gains significant control over an entire industry or market.
Conglomerate integration
A conglomerate has acquired many (diversified businesses)
Limits to business growth
- Regulations
- Threat of competition from new technologies
- Financial constraints
- Size of the market
Horizontal integration
Horizontal integration is a merger or takeover between two businesses in the same industry at the same stage of production.
Examples might include two car manufacturers merging. Or one commercial bank buying another bank.
Horizontal integration (Advantages)
- Reduces competition -> saves cost
- Creates a wider range of products
- Economies of scale
Horizontal integration (Disadvantages)
- Reduced flexibility –> More legal paper work
- Risk of diseconomies of scale
- Risk of government intervention to prevent rising prices and declining consumer welfare
Demergers
A de-merger is when a firm decides to split into separate (two or more) firms
Reason for demerging
- Focusing on core businesses to help cut average costs and therefore improve profit margins & returns to shareholders (owners)
- Reduce the risk of diseconomies of scale by reducing the range of functions in a business, and achieve lower management costs
- Raise money from asset sales and return it to shareholders which in turn can lift the share price for investors
- Avoiding the attention of competition authorities who might be investigating monopoly power
Demergers (Impact on businesses)
- Long term – higher profits as cost savings are made
- Short term - financial cost of selling off one or more businesses
Demergers (Impact on consumers)
- Choice and Competition
- Potential changes in quality
- New brand name
Demergers (Impact on workers)
- Job Uncertainty
- Changes in Compensation and Benefits
- Opportunities and Growth
