BIRLA INSTITUTE OF TECHONOLOGY

MESRA-835215, RANCHI- NOIDA CAMPUS

DEPARTMENT OF MANAGEMENT - I

MANAGERIAL ECONOMICS
(MT 408)

TOPIC: EXPANSION TRHOUGH INTEGRATION

Submitted By:

Mr. Bhanu Pratap Singh (MBA/45002/22)

Mr. Varun (MBA/45005/22)

Mr. Shakti Kumar Singh (MBA/45009/22)

Submitted To: Prof. Monika Bisht

 ACKNOWLEDGEMENT

We would like to express our deep sense of gratitude to

Prof Monika Bisht for her support, efforts and timely
guidance. The assignment couldn’t have been
completed without the support and cooperation of our
group members. It also helped us in doing a lot of
research which gave us a knowledge about so many
new things.
 INTRODUCTION
The Expansion through Integration means combining one or more present
operation of the business with no change in the customer groups. This
combination can be done through a value chain.

The value chain comprises of interlinked activities performed by an

organization right from the procurement of raw materials to the marketing of
finished goods. Thus, a firm may move up or down the value chain to focus
more comprehensively on the needs of the existing customers.

The expansion through integration widens the scope of the business and thus
considered as the grand expansion strategy.

There are two ways of integration:

1) Vertical Integration
2) Horizontal Integration
Vertical integration:
The vertical integration is of two types: forward and backward. When an
organization moves close to the ultimate customers, i.e., facilitate the sale of the
finished goods is said to have made a forward integration. Example, the
manufacturing firm open up its retail outlet. Whereas, if the organization
retreats to the source of raw materials, is said to have made a backward
integration. Example, the shoe company manufactures its own raw material
such as leather through its subsidiary firm.

Horizontal Integration:
A firm is said to have made a horizontal integration when it takes over the same
kind of product with similar marketing and production levels. Example, the
pharmaceutical company takes over its rival pharmaceutical company.

Types of Vertical Integration

There are a number of ways that a company can achieve vertical integration.
Two of the most common are backward and forward integration.

Backward Integration
A company that chooses backward integration moves the ownership control of
its products to a point earlier in the supply chain or the production process.

This form of vertical integration is aptly named as a company often strives to

acquire a raw material distributor or provider towards the beginning of a supply
chain. The companies towards the start of the supply chain are often specialized
in their distinct step in the process (i.e., a wood distributor to a furniture
manufacturer). In an attempt to streamline processes, the furniture manufacturer
would try to bring the wood sourcing in-house.

Amazon.com, Inc. started as an online retailer of books that it purchased from

established publishers. It still does that, but it also has become a publisher. The
company eventually branched out into thousands of branded products. Then, it
introduced its own private label, Amazon Basics, to sell many of them directly
to consumers.

Forward Integration
A company that decides on forward integration expands by gaining control of
the distribution process and sale of its finished products.

A clothing manufacturer can sell its finished products to a middleman, who then
sells them in smaller batches to individual retailers. If the clothing manufacturer
were to experience forward vertical integration, the manufacturer would join a
retailer and be able to open its own stores. The company would aim to bring in
more money per product, assuming it can operate its retail arm efficiently.

Forward integration is a less common form for vertical integration because it is

often more difficult for companies to acquire other companies further along the
supply chain. For example, the largest retailers at the end of the supply chain
often have the greatest cashflow and purchasing power. Instead of these retailers
being acquired, they often have the capital on hand to be the acquirer (an
example of backward integration).
Balanced Integration
A balanced integration is a vertical integration approach in which a company
aims to merge with companies both before it and after it along the supply chain.
A company must be "the middleman" and manufacture a good to engage in a
balanced integration, as it must both source a raw material as well as work with
retailers to deliver the final product.

Consider the supply chain process for Coca-Cola where raw materials are
sourced, the beverage is concocted, and bottled drinks are distributed for sale.
Should Coca-Cola choose to merge with both its raw material providers as well
as retailers who will sell the product, Coca-Cola is engaging in balanced
integration.

Though most costly and most risky due to the diversified nature of business
operations, balanced integration also poses the greatest upside as a company is
more likely to have greater (if not full) control over the entire supply chain
process.

Advantages and Disadvantages of Vertical

Integration
Vertical integration can help a company reduce costs and improve efficiency.
However, when executed poorly, vertical integration may have negative
consequences on the company.

Advantages
The primary goal of vertical integration is to gain greater control over the
supply chain and manufacturing process. When performed well, vertical
integration may lead to lower costs, economies of scale, and a lower reliance on
external parties.

Vertical integration may lead to lower transportation costs, smaller turnaround

times, or simpler logistics if the entire process is managed in-house. This may
also result in higher quality products as the company has direct control over the
raw materials used through the manufacturing line.

Sometimes, companies are at the whim of suppliers who have market power.
Through vertical integration, companies can circumnavigate external
monopolies. In addition, a company may gain insights from a retailer on what
goods are selling best; this information may be very useful in making
manufacturing and product decisions.

Disadvantages
Companies can't vertically integrate overnight; it is a long-term process that
requires widespread buy-in. This also includes heavy upfront capital
expenditure requirements to acquire the proper company, integrate new and
existing systems, and ensure staff are trained across the entire manufacturing
process.

By vertically integrating, companies do sacrifice a little bit of flexibility. This is

because they are committing capital to a specific process or product. Instead of
being able to decline purchasing from an external vendor, a company will likely
have committed money that cannot be easily recovered. In addition, a company
may lose the opportunity to gain unique knowledge through different external
vendors.
Vertical integrate may also have several social impacts. Companies may end up
trying to do too much and lose focus of their ultimate goal. In addition,
customers may not support the culture of a large manufacturer also interfacing
directly with customers.

Types of Horizontal Integration

There are three primary forms of horizontal integration: mergers, acquisitions,
and internal expansions.

Merger
When two companies merge, two separate entities create a new, joint
organization. The brand of one of those two companies is usually retained,
though the composition of operations and personnel is shared between both of
the former individual companies. In addition, the product line of both
companies is often similar and equally competitive in the market.

In a merger, both companies are striving to become a larger presence in their

existing market. Most mergers are of similar firms, where integration of the two
companies may be seamless due to the similarities between what the two former
companies used to do.

Acquisition
Similar to a merger, an acquisition occurs when one company outright takes
over the operations of another company. Though the two companies technically
join together, one company remains in control. The acquiring company's staff,
executives, and operations often remain in place, while the acquired company's
resources are integrated as management sees fit.

Companies often pursue acquisitions in an attempt to get something specific.

For example, Microsoft specifically wanted to enhance its presence in the video
game market. Therefore, it acquired Activision Blizzard in January 2022.2 This
example of an acquisition shows an often-deliberate strategy for a specific
sector in which a company wants to achieve a very specific goal.

Internal Expansion
Companies can also embark on horizontal integration by making more
conscious allocations of internal capital. Through internal expansion, a
company simply chooses to strategically change course and apply more
resources in a different way. For example, a restaurant can expand to offer
catering companies, or a beverage manufacturer may branch off to make food
products.

In these examples, a company continues to operate how it used to. However,

instead of committing capital to acquire an external company or transition with
a merging firm, it decides to deploy those resources in-house to train staff, buy
equipment, make capital investments, and grow a new branch of operations on
its own.

Advantages and Disadvantages of Horizontal

Integration
Advantages
Companies engage in horizontal integration to benefit from synergies. There
may be economies of scale or cost synergies in marketing; research and
development (R&D); production; and distribution. Or there may be economies
of scale, which make the simultaneous manufacturing of different products
more cost-effective than manufacturing them on their own.

Procter & Gamble’s 2005 acquisition of Gillette is a good example of a

horizontal merger that realized economies of scope. Because both companies
produced hundreds of hygiene-related products from razors to toothpaste, the
merger reduced the marketing and product development costs per product.

Synergies can also be realized by combining products or markets. Horizontal

integration is often driven by marketing imperatives. Diversifying product
offerings may provide cross-selling opportunities and increase each business’
market. A retail business that sells clothes may decide to also offer accessories
or it might merge with a similar business in another country to gain a foothold
there and avoid having to build a distribution network from scratch.

Disadvantages
Like any merger, horizontal integration does not always yield the synergies and
added value that was expected. It can even result in negative synergies which
reduce the overall value of the business, if the larger firm becomes too unwieldy
and inflexible to manage, or if the merged firms experience problems caused by
vastly different leadership styles and company cultures.

There are regulatory issues as well. If horizontal mergers within the same
industry concentrate market share among a small number of companies, it
creates an oligopoly. If one company ends up with a dominant market share, it
has a monopoly. If a merger threatens competitors or seems to drastically
restrict the market and reduce consumer choices, it could attract the attention of
the Federal Trade Commission.