3.2.2 Mergers and Takeovers (Integration)

Question 1

3 types of integration

Answer 1

1) Horizontal integration

• vertical integration

Comes in 2 types.

2) Backward vertical integration
3) Forward vertical integration

Question 2

Horizontal integration

Answer 2

Acquiring a business at the same stage of the supply chain

-e.g a business in the primary sector will merge with another business in the primary sector e.g. one farm mergers with another to expand capacity

Question 3

4 Benefits of horizontal integration

Answer 3

-Reduced competition-One less competitor in the market ( Main point you need to know)

• common knowledge of the markets in which they both operate in
• Less likelihood of failure than merging with two different areas of businesses
• Similar skills of employees
• less disruption

Question 4

Vertical integration

Answer 4

When firms in different stages of production join together.

-For example a business in the primary sector will merge with a business in a different sector e.g. a farm will merge with local shop so it has an outlet for its produce such as meat and milk

Question 5

What are the two types of vertical integration

Answer 5

Backward vertical integration

Forward vertical integration

Question 6

Backward vertical integration

Answer 6

Acquiring a business in the previous stage of the supply chain e.g Apple buying chip supplier

Question 7

Advantages of Backward vertical integration

(3)
Cost
control
Competitive advantage

Answer 7

• Better control :
  -gain control of quality of raw materials that are used in the production of the end product
  -Also achieve greater control over the quantity and delivery of the raw materials to its warehouse
• Cost control :
• No middlemen involved in the process of purchasing and receiving raw materials
  -Transport costs removed
• Competitive advantage :
• Acquiring suppliers means that you can prevent competitors from using the same resources and they have to look for substitutes in the market
• can also charge higher prices for them.

Question 8

2 disadvantages of backward vertical integration

Answer 8

1) - By limiting competition it can result in sluggishness and a lack of innovation.The business will be less motivated to spend money on R&D as there are no rivals around.As a result the quality of the companies end product may decline which can cause customers to complain.

2) -Substantial investment required actually finance the integration.
-May have to use up cash reserves or take up debts.

Question 9

Forward vertical integration

Answer 9

Acquiring a business that is in the next stage of the supply chain

-where a firm merges / takes over a customer e.g. a chocolate manufacturer buying a chain of newsagents

Question 10

3 Advantages of forward vertical integration

Answer 10

• Gives manufactures guaranteed outlets for their output
• Creates barriers to potential competitors

This is because competitors may face limited access to distribution channels.

• Reduced costs + Increased profits.
  -due to distribution costs being reduced (?)

Question 11

2 Disadvantages of forward vertical integration

Answer 11

• High levels of costs maintaining two companies.
  -Risky so you have to carefully analyse wether the benefits of forward integration exceed its costs.
• Less focus on original business
  -Management focus could shift to new business which can mean you lose focus on OG business.

Risky as because if the profitability of the original business falls then the whole synergy can collapse.