Vertical integration

In microeconomics and management, the term vertical integration describes a style of control. Microeconomics is a branch of Economics that studies how individuals households and firms and some states make decisions to allocate limited resources typically in markets Management (covering theory practice and scope of management and Manager' (covering the people who manage might help clarify and systematise Control is one of the managerial functions like planning, organizing, staffing and directing. Vertically integrated companies are united through a hierarchy and share a common owner. @@@ main@@@ - title Hierarchy@@@ keywords structure; sociology; information@@@ review@@@ - Usually each member of the hierarchy produces a different product or service, and the products combine to satisfy a common need. In Marketing, a product is anything that can be offered to a Market that might satisfy a want or need A human need can be defined either psychologically or objectively It is contrasted with horizontal integration. In Microeconomics and Strategic management, the term horizontal integration describes a type of ownership and control Vertical integration is one method of avoiding the hold-up problem. The hold-up problem is a term used in Economics to describe a situation where two parties (such as a supplier and a manufacturer may be able to work most efficiently by cooperating A monopoly produced through vertical integration is called a vertical monopoly, although it might be more appropriate to speak of this as some form of cartel. In Economics, a monopoly (from Greek monos, alone or single + polein, to sell exists when a specific individual or enterprise has sufficient In Economics, a monopoly (from Greek monos, alone or single + polein, to sell exists when a specific individual or enterprise has sufficient A cartel is a formal (explicit agreement among firms Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve

One of the earliest, largest and most famous examples of vertical integration was the Carnegie Steel company. Carnegie Steel Company was a steel producing company created by Andrew Carnegie to manage business at his Steel mills in the Pittsburgh Pennsylvania The company controlled not only the mills where the steel was manufactured but also the mines where the iron ore was extracted, the coal mines that supplied the coal, the ships that transported the iron ore and the railroads that transported the coal to the factory, the coke ovens where the coal was coked, etc. Steel is an Alloy consisting mostly of Iron, with a Carbon content between 0 Iron ores are rocks and Minerals from which Metallic Iron can be economically extracted Coke is a solid Carbonaceous material derived from Destructive distillation of low-ash low-sulfur Bituminous coal. Later on, Carnegie even established an institute of higher learning to teach the steel processes to the next generation.

1 Three types
2 Examples
- 2.1 Oil industry
- 2.2 Technology industry
3 Problems and benefits
- 3.1 Static technology
- 3.2 Dynamic technology
4 Vertical expansion
5 See also
6 References

Three types

Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers. Contrary to horizontal integration, which is a consolidation of many firms that handle the same part of the production process, vertical integration is typified by one firm engaged in different aspects of production (e. g. growing raw materials, manufacturing, transporting, marketing, and/or retailing).

There are three varieties: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (horizontal) vertical integration.

In backward vertical integration, the company sets up subsidiaries that produce some of the inputs used in the production of its products. For example, an automobile company may own a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their final product. It was the main business approach of Ford and other car companies in the 1920s, who sought to minimize costs by centralizing the production of cars and car parts. Ford Motor Company is an American Multinational corporation and the world's fourth largest automaker based on Worldwide vehicle sales, following The 1920s is sometimes referred to as the " Jazz Age " or the " Roaring Twenties " when speaking about the United States and Canada Centralization (or centralisation) is the process by which the activities of an organization particularly those regarding decision-making become concentrated within
In forward vertical integration, the company sets up subsidiaries that distribute or market products to customers or use the products themselves. Distribution (or place) is one of the four elements of Marketing mix. In popular usage "marketing" is the promotion of products especially Advertising and Branding However in professional usage the term has a wider meaning of An example of this is a movie studio that also owns a chain of theaters.
In balanced vertical integration, the company sets up subsidiaries that both supply them with inputs and distribute their outputs.

For example, a hamburger manufacturer that owns the farms where they raise the cows, chickens, potatoes and wheat as well as the factories that processes these agricultural products is practising backwards vertical integration. Forwards vertical integration would mean that they would own the regional distribution centers and shops or fast food restaurants where the hamburgers are sold. Balanced vertical integration would mean that they own all of these components.

Examples

Oil industry

One of the best examples of vertically integrated companies is the oil industry. Oil companies, both multinational (such as ExxonMobil, Royal Dutch Shell, or BP) and national (e. The Exxon Mobil Corporation, or ExxonMobil, is an American oil and gas Corporation and a direct descendant of John D Royal Dutch Shell plc, commonly known simply as Shell, is a multinational oil company of Dutch and British origins BP plc, previously known as British Petroleum, is the third largest global Energy company, a multinational oil company (" Oil major g. Petronas) often adopt a vertically integrated structure. Petronas, short for Petroliam Nasional Berhad, is a Malaysian owned oil and gas company that was founded on August 17 1974. This means that they are active all the way along the supply chain from locating crude oil deposits, drilling and extracting crude, transporting it around the world, refining it into petroleum products such as petrol/gasoline, to distributing the fuel to company-owned retail stations, where it is sold to consumers. Petroleum ( L petroleum, from Greek πετρέλαιον, lit A refinery is composed of a group of Chemical engineering unit processes and Unit operations used for Refining certain materials or converting

Technology industry

A recent example that illustrates a company vertically integrating upstream in its production process is the acquisition of PA Semiconductor by Apple Inc. PA Semiconductor is a developer of processors based on IBM's PowerPC line, which could potentially be used by Apple in its product line-up. PA Semi (originally "Palo Alto Semiconductor" is a Fabless semiconductor company founded in Santa Clara California in 2003 by Dan Dobberpuhl Apple Inc, ( formerly Apple Computer Inc, is an American Multinational corporation with a focus on designing and manufacturing Consumer electronics International Business Machines Corporation abbreviated IBM and nicknamed "Big Blue", is a multinational Computer Technology PowerPC is a RISC Instruction set architecture created by the 1991 Apple – IBM – Motorola alliance known as AIM As industry experts have noted, it is extremely rare for a company to integrate a supplier of a good that is subject to economies of scale (such as the semiconductor industry). However, as illustrated by Lyons' test of Williamsons theory of Asset specificity, a company is more likely to give up the cost-benefit of economies of scales when it requires a specific asset that would otherwise make it dependent on a supplier. Asset specificity is a term related to the inter-party relationships of a transaction In this particular case, Apple's secretive corporate culture also allows us to infer that buying PA Semiconductor, gives them more control over their suppliers, eliminating the risk that the supplier gains control of copyright and patent technology. As a result Apple Inc. is becoming an increasingly integrated firm, controlling every stage from the supply of product inputs, to the distribution of its products on the high-streets.

Problems and benefits

There are internal and external (e. g. society-wide) gains and losses due to vertical integration. They will differ according to the state of technology in the industries involved, roughly corresponding to the stages of the industry lifecycle.

Static technology

This is the simplest case, where the gains and losses have been studied extensively.

Internal gains:

Lower transaction costs
Synchronization of supply and demand along the chain of products
Lower uncertainty and higher investment
Ability to monopolize markthroughout the chain by market foreclosure

Internal losses:

Higher monetary and organizational costs of switching to other suppliers/buyers

Benefits to society:

Better opportunities for investment growth through reduced uncertainty

Losses to society:

Monopolization of markets
Rigid organizational structure, having much the same shortcomings as the socialist economy (cf. In Economics and related disciplines a transaction cost is a Cost incurred in making an economic exchange Supply and demand is an Economic model describing effects on price and quantity in a Market. In Economics, a monopoly (from Greek monos, alone or single + polein, to sell exists when a specific individual or enterprise has sufficient Socialist economics is a broad and sometimes controversial term John Kenneth Galbraith's works), etc. . .
Monopoly on intermediate components (with opportunity for price gouging) leads to a throwaway society

Dynamic technology

Some argue that vertical integration will eventually hurt a company because when new technologies are available, the company is forced to reinvest in its infrastructures in order to keep up with competition. Price gouging is a Pejorative term for a seller pricing much higher than is considered reasonable or fair The throw-away society is a human society strongly influenced by Consumerism. Some say that today, when technologies evolve very quickly, this can cause a company to invest into new technologies, only to reinvest in even newer technologies later, thus costing a company financially. However, a benefit of vertical integration is that all the components that are in a company product will work harmoniously, which will lower downtime and repair costs.

Vertical expansion

Vertical expansion, in economics, is the growth of a business enterprise through the acquisition of companies that produce the intermediate goods needed by the business or help market and distribute its final goods. Economics is the social science that studies the production distribution, and consumption of goods and services. Such expansion is desired because it secures the supplies needed by the firm to produce its product and the market needed to sell the product. A business (also called firm or an enterprise) is a legally recognized organizational entity designed to provide goods and/or services to The result is a more efficient business with lower costs and more profits.

Related is lateral expansion, which is the growth of a business enterprise through the acquisition of similar firms, in the hope of achieving economies of scale. Lateral expansion (sometimes known as horizontal expansion) in Economics, is the growth of a business enterprise through the acquisition of similar companies in

Vertical expansion is also known as a vertical acquisition. Vertical expansion or acquisitions can also be used to increase scales and to gain market power. The acquisition of DirectTV by News Corporation is an example of vertical expansion or acquisition. DirectTV is a satellite TV company through which News Corporation can distribute more of its media content: news, movies, and television shows.

References

Martin K. A conglomerate is a large Company that consists of seemingly unrelated Business sections A vertical market is a group of similar businesses and Customers which engage in trade based on specific and specialized needs Exclusive dealing refers to when a retailer or wholesaler is ‘tied’ to purchase from a supplier on the understanding that no other distributor will be appointed or receive supplies Strategic management is the art science and craft of formulating implementing and evaluating cross-functional decisions that will enable an organization to achieve its objectives is a Japanese term referring to industrial and financial business conglomerates in the Empire of Japan, whose influence and size allowed for control over significant For a topic outline on this subject see List of basic Japan topics. Chaebol (alternatively Jaebol, Jaebeol) refers to a South Korean form of business conglomerate. In Microeconomics and Strategic management, the term horizontal integration describes a type of ownership and control The economic calculation problem is a criticism of Socialist economics. A planned economy or directed economy is an Economic system in which the Government or Workers' councils manages the Economy. Vertical Disintegration refers to a specific organizational form of industrial production Alfred DuPont Chandler Jr ( September 15 1918 &ndash May 9 2007) was a professor of business history at Harvard Business School, Perry. "Vertical Integration: Determinants and Effects". Chapter 4 in: Handbook of Industrial Organization. North Holland, 1988.

Dictionary