Vertical and Horizontal Integration

How they relate to Economies Of Scale

Vertical Integration

When a company expands its business into areas that are at different points on the same production path.
  • a manufacturer owns its supplier and/or distributor
  • each member of the supply chain produces a different product or service and the combine to satisfy a common need

Benefits:


  • helps companies reduce costs
  • improves efficiency by decreasing transportation expenses and turnaround time

Horizontal Integration

The merger of companies at the same stage of production in the same or different industries
  • if the product of the companies are similar then it is a merger of competitors
  • when all producers of a good or service in a market merge, it creates monopoly

Benefits:

  • eliminates competition from other companies
  • a cheap way to enter an new market

Economies of Scale

The cost per unit of production decreases as volume of product increases.
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How VI relates with Economies if Scale

Forward integration:


  • If the manufacturing company engages in sales or after-sales industries it pursues forward integration strategy
  • Strategy is implemented when the company wants to achieve higher economies of scale and larger market share


Vertical Expansion:


  • the growth of a business enterprise through the acquisition of similar firm
  • used to increase scales and gain market power

Biggest advantage: it often creates economies of scale and lowers production costs because it eliminates many of the price mark-ups in each production step

How HI relates with Economies of Scale


  • Can be achieved by selling more of the same product, eg., by geographic expansion
  • A HI company is able to get EOS as it offers large quantity of the product or service in various markets
  • in industries with high fixed costs, HI enables companies to benefit with higher output with leads the firm to benefit from EOS