Lesson 3

Market Integration
REPORTERS:
RHYZEN CARIÑO
CARLOS ANGEL BATAD
KENNETH SABANGAN
 REPORTER: RHYZEN CARIÑO

Market Integration
• Integration shows the relationship of firms in a market. The extent of
integration influences the market conduct of the firms and consequently
their marketing efficiency.
• Markets differ in the extent of integration and, therefore, there is a
variation in their degree of efficiency.
 According to Ulrich Koester
• INTEGRATION
• -IS A STATE OF AFFAIRS OR A PROCESS INVOLVING ATTEMPTS TO
COMBINE SEPARATE NATIONAL ECONOMIES INTO A LARGER
ECONOMIC REGIONS.
 FORMS OF INTEGRATIONS
1. Preferential agreement
- Involves lower trade barriers between those countries, which have signed the agreement.
2. Free Trade Area
- Reduces barriers to trade among member countries to zero, but each member country still
has autonomy in deciding the external rate of tariff for its trade with non-member countries.
3. Custom Union
- In this form, Countries agree to abolish tariff and non-tariff barriers to trade in goods
flowing between them.
4. Common Markets
- allows for free movement of labor and capital within the member countries.
5. Economic Union
- is the highest form of economic integration.
 Market Integration
• Market integration occurs when prices among different locations or
related goods follow similar patterns over a long period of time. Groups of
goods often move proportionally to each other and when this relation is
very clear among different markets it is said that the markets are
integrated.
• Market integration is an indicator that explains how much different
markets are related to each other.
• Market integration is the fusing of many markets into one.
 TWO TYPES OF MARKET
INTEGRATION
NEGATIVE MARKET INTEGRATION
-This type of Market integration is reduces the Non-tariff and tariff barrier to trade as
main tool for integrating markets
(Note: Tariff is a tax or duty to be paid on a particular class of imports or exports or
the fix price of product according to a tariff.)
“ the reduction of trade barriers and import tariffs”.

POSITIVE MARKET INTEGRATION

-This type of market integration is it adjusts the domestic policies and institutions
through the creation of supranational arrangements.
(Note: Supranational arrangements is a type of multinational political union where
negotiated power is delegated to an authority by governments of member states. The
Governments of Governments)
• Global market integration means that price differences between countries
are eliminated as all markets become one. One way to the progress of
globalization is to look at trends how prices converge or become similar
across countries.
• Trading cost fall when new product invented or developed becomes
cheaper and also, some cost is man-made like when they impose a barrier
for trade.
• Trade
• refers to countries within the region which create deals like cheaper tariffs
to for easier import/export. Through Politics, leaders of countries within
the region often perform social visits to talk agreements despite
differences and show solidarity and support to those they are in agreement
with.
 EXAMPLE TYPE OF TRADE

BARTER SYSTEM
-IS AN ALTERNATIVE METHOD OF TRADING WHERE
GOODS AND SERVICES ARE EXCHANGED DIRECTLY FOR ONE
ANOTHER WITHOUT USING MONEY AS AN INTERMEDIARY
The Cambridge Business English Dictionary
defines Market Integration

• Market Integration as “a situation in which separate markets for the same

product become one single market, for example when an import tax in one
of the market is removed.”
 Types of Market Integration
1. Horizontal Integration
2. Vertical Integration
3. Forward Integration
4. Backward Integration
 Horizontal Integration
• This occurs when a firm or agency gains control to other firms or agencies
performing similar marketing functions at the same level in the marketing
sequence.
• In this type of integration, some marketing agencies combine to form a
union with a view to reducing their effective number and the extent of
actual competition in the market.
• It is advantageous for the members who join the group.
 7 MARKETING FUNCTIONS
1. PROMOTION
-When People map out their marketing goals, promotion is usually at or near the top of that
list. Getting your name in front of prospective customers, building brand awareness and raising
your company’s profile are major priorities for every marketing department.
2. SELLING
-We’ve often cautioned readers about the dangers of coming on too strong and salesy with
your marketing content.
3. PRODUCT MANAGEMENT
- Designing a new product that better meets customer needs and fills a gap in the
marketplace doesn’t happen by coincidence or sheer luck.
4. MARKETING INFORMATION MANAGEMENT
-Strategic marketing is driven by data. Every good marketer knows that the more information you
can gather about your target customer.
5. PRICING
- Marketing research can also inform how brands set the price of a product.
6. FINANCING
-Now we’re digging into some of the less-discussed functions of marketing, although they’re still
very important to overarching business objectives.
7. DISTRIBUTION
-Distribution?, you may be asking yourself, ‘isn’t that supply chain management’s problem?”
-Choosing the right distribution channels comes down to understanding who your target customer
is, how they view your brand and where they expect to find you – all marketing-centric issues.
 Advantages of Horizontal Integration
• Larger Market Share. The most obvious benefit is an increased market share or
market power. When two companies merge, they also combine the product base,
technology, and services that are available on the market.
• Bigger Base of Customers. Because the two companies may be operating in the
same industry, they may not necessarily have the same customer base.
• Increased Revenue. By increasing its customer base, the new company can now
boost its revenue. In fact, it’s typical for companies that undergo a horizontal
integration to see more revenue than when they were individual entities.
 Additional Benefits
• Reducing competition
• Increasing other synergies such as marketing
• Creating economies of scale and economies of scope.
 Disadvantages of Horizontal Integration
• Regulatory Scrutiny. The first and most troublesome is the level of
scrutiny this kind of strategy faces, especially from government agencies.
Big mergers like these are the reason why antitrust laws are in place.
• Additional Cons.
(1) Stunting economic growth of the new enterprise
(2) Reduced flexibility: This happens because the company is now a larger
organization.
 REPORTER: CARLOS ANGEL BATAD

Vertical Integration
• This occurs when a firm performs more than one activity in the sequence
of the marketing process.
• It is a linking together of two or more functions in the marketing process
withing a single firm or under a single ownership.
• Makes it possible to exercise control over both quality and quantity of the
product from the beginning of the production process until the product is
ready for the consumer.
 Two issues have to be considered before
integration:
•  Costs - An organization should vertically integrate when costs of
making the product inside the company are lower than the costs of
buying that product in the market. 
• Scope of the firm - A firm should consider whether moving into new
industries would not dilute its current competencies. New activities in
a company are also harder to manage and control. The answers to
previous questions determine if a company will pursue none, partial
or full VI.
 Difference between vertical and horizontal
integrations
• • VI is different from horizontal integration, where a corporate
usually acquires or mergers with a competitor in a same industry.
• • An example of horizontal integration would be a company
competing in raw materials industry and buying another company in
the same industry rather than trying to expand to intermediate goods
industry.
 Advantages of Vertical Integration
• It allows you to invest in assets that are highly specialized. Vertical integration can
give you a great advantage over your competitors, allowing you to invest and develop
the products that you are currently offering. By being able to acquire highly specialized
assets, you will be able to differentiate your business from the rest of your industry.
• It gives you more control over your business. One great benefit that is sought by
companies that are getting into vertical integration is more control over the value
chain. They would gain more control over the production aspect of their distribution
processes. In the same manner, when manufacturing companies perform retailing or
distribution.
• It allows for positive differentiation. This business strategy can give an organization
important access to more production inputs, process and retail channels. Each of these
elements can offer great opportunities. A retail business, it can adopt more quickly to
the changing consumer needs by owning a production or manufacturing firm that can
create its products. For manufacturers, they could sell through the web and take
advantage of online advertising techniques.
• It requires lower costs of transaction. This can be realized through inter
transactions that can be made between subsidiaries that typically have a central
communication and management system that is inexpensive to employ.
 Disadvantages of Vertical Integration
• It can have capacity-balancing problems. A good example of this
situation is when a business needs to establish excess upstream capacity to
ensure its downstream operations will get sufficient supply under any
demand condition. This might even result in retaliation of the business’s
former suppliers.
• It can bring about more difficulties. Take note that vertical mergers will
have less economies of scale, as most of their production process are at
different levels. Moreover, there is sill scope for monopoly power.
• It can result in decreased flexibility. The main contributors to this
problem are the upstream and downstream investments the business in
making.
• It can create some barriers to market entry. Manufacturing business
that have control over access to crucial raw materials and components that
are quite scarce due to vertical integration would often create some
barriers to market entry. They are influencing market concentration.
 Types of vertical integration
Firms can pursue forward, backward or balanced VI strategies.

 •
 Forward Integration
• A form of vertical integration in which a company moves forward on its
production path towards the distribution of its products or services.
• A company undertakes forward integration by acquiring or merging with
business entities that were its customers while still maintaining control
over its initial business.
 Advantages of Forward Integration
• Increase the company’s market share. A company may increase its market
share by implementing forward integration strategy. The strategy eliminates
various transaction and transportation costa that subsequently result in a
lower final price for the company’s product.
• Gain control over distribution channels. A company employs the strategy
if it is willing to obtain control over distribution channels in its industry.
Control is crucial for companies that operate in industries that lack qualified
distributors. The strategic independence of a company from third parties.
• Competitive advantage. Successful implementation of the strategy may
provide a company with a competitive advantage over its competitors.
Low costs and control over industry distribution channels can become key
factors in achieving competitive advantage.
• Create barriers to potential competitors. The integration of entities
forward of the company’s production vertical strengthens its position in
the industry and establishes obstacles to potential rivals. For example, if a
company integrates a large industry retailer.
 Disadvantages of Forward Integration
• Bureaucratic inefficiencies. Merger and acquisition deals related to
inefficiencies as a result of the enlarged bureaucratic apparatus of the new
business entity.
• Failure to realize synergies between the companies. In the forward
integration strategy, a company may fail to realize synergies between the
involved entities. Improper implementation of the strategy can be one of
the reasons for the unrealized synergy potential.
• High costs. Mergers or acquisitions necessary for undertaking forward
integration may require substantial funds to execute. A company must be
certain that the benefits from the implementation of the strategy will
exceed its costs.
 REPORTER: KENNETH SABANGAN

Backward Integration
• It Is the expansion of a business to new levels of the supply chain moving
in the opposite direction of the customer. This is often compared to
forward integration, the expansion to new levels of the supply chain
moving towards the customer.
The following are illustrative examples of
backward integration.
 5 Examples of Backward Integration
• Suppliers
• A supplier of silicon for the solar panel industry begins to produce its own polysilicon wafers.
• Manufacturing
• A manufacturer of coffee begins to run its own coffee plantations. This may be done to cut costs, secure a
reliable supply and/or improve quality.
• Distribution
• A distributor of office suppliers begins to manufacture its own paper products. This may be done to improve
profit margins by capturing more of the value-added process.
• Retail
• A fashion retailer begins designing and manufacturing its own line of clothing.
• Services
• A software consulting firm begins to develop its own software products.
 Advantages of Backward Integration
• Increased control. Companies can control their value chain in more a
efficient manner.
• Cost Control. Costs can be considerably controlled all along the
distribution process.
• Competitive Advantages. Some companies adopt backward integration
in order to block competitors from gaining any access to important
markets or scarce resources.
• Differentiation. Backward integration allows companies to access an
increasing number of production inputs and distribution resources.
 Drawbacks of Backward Integration
• Although backward integration has a number of benefits, it also has some drawbacks such as the
following:
• 1. It builds up excess upstream capacity to ensure that downstream has an adequate supply 1even
when the demand is heavy. This involves increased investment.
• 2.The process leads to lack of supplier competition that will lead to low efficiency resulting in
potentially higher costs.
• 3. In due course, there are high chances that the flexibility will get reduced owing to previous
investments upstream and also downstream.
• 4. In case there is a need for substantial in-house requirements, then it will diminish the capability of
producing the product variety.
• 5. At certain times, existing competencies need to be sacrificed in order to develop fresh core
competencies.
 Disadvantages of Backward Integration
• It builds up excess upstream capacity to ensure that downstream has
an adequate supply even when the demand is heavy. This involves
increased investment.
• The process leads to lack supplier competition that will lead to low
efficiency resulting in potentially higher costs.
• In due course, there are high chances that flexibility will get reduced
owning to previous investments upstream and downstream.
• Inefficiencies
Implementing backward integration can result in inefficiencies. By acquiring the supplier of raw
materials required in the production process, the company will limit competition, resulting in
sluggishness and lack of innovation. The company will be less motivated to spend money on
research and development. As a result, the quality of the company’s end product(s) may decline, and
the costs of managing customer complaints will increase.
• Substantial investment
Another disadvantage of backward integration is the substantial investment that will be needed to
finance the acquisition. The company may be forced to utilize all its cash reserves and even take up
more debts to finance the acquisition. If the company is unable to repay the debts or enjoy the
benefits of the acquisition, it will face the risk of default and even liquidation.
• Backward Integration vs. Forward Integration
While backward integration is the merging and
acquisition of companies in the upper side of the supply
chain, forward integration is the acquisition of companies
on the lower part of the supply chain. In forward
integration, the company is interested in acquiring
distributors of its products or the retail stores that sell the
final products to the end consumer.
Importance of Market
Integration
• Globalization and Market Integration
• Contributions to Management Science. This lesson introduces the concept of stock market
integration. In theory, market integration should increase financial and economic efficiency,
and lead to a higher economic growth. However, market integration may increase asset
return volatility, and cause financial instability and contagion effects.
• Marketing Segments
• Technology has increased the avenues available for advertising and other marketing
campaigns. The most effective campaigns will incorporate as many forms of media as
possible to reach the widest possible audience. While the messages that make up a
marketing campaign will need to be delivered differently on each platform, it’s important
that it still be the same message.
 Factors Affecting Market Integration
• Driving forces. converging market needs and wants, technology
advances, pressure to cut costs, pressure to improve quality.
• Regional Economic Agreements. under attack by developing countries in
Europe, the expanding membership of the European Union is lowering
barriers to trade within the region.
• Market Needs & Wants. The common elements in human nature provide
and underlying basis for the opportunity to create and serve global
markets.
• Market has driven this change in behavior. Multinational companies
pursuing strategies of product adaptation run the risk of being overtaken
by global competitors that have recognized opportunities to serve global
customers.
• Product Development Costs. The pressure for globalization is intense
when new products require major investments and long periods of
development time.
• Global competition has forced all companies to improve quality. For
truly global products, uniformity can drive down research, engineering,
design, and production costs across business functions.
 Three reason why economic growth has been a driving force in the
expansion of the international economy and the growth of global marketing.

• First: Slow growth in a company’s domestic market can signal the need to
look abroad for opportunities in nations or regions with high rates of
growth.
• Second: Economic growth has reduced resistance that might otherwise
have developed in response to the entry of foreign firms into domestic
economies.
• Third: Domestic business are more likely to seek governmental
intervention to protect their local position if markets are not growing.
THANK YOU!