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.
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
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