Essay Plans

Distinguish between horizontal, lateral and diversifying integration. Examine the factors which encourage/discourage each type of integration.

SYNOPSIS:

POINTS:

  1. Horizontal - merging of firms engaged at the same stage of production in the same industry.

  2. Vertical - merging of firms engaged in different stages of production in the same industry (backwards or forwards).

  3. Lateral - merging of two firms at the same stage of production in similar industries eg. a pub and a wine bar.

  4. Conglomerate/diversifying - merging of two firms engaged in different industries though not necessarily at different stages of production.

  5. Reasons for horizontal:

    • Increased penetration of existing markets with existing products.
    • Encourages exploitation of economies of scale (expand on this giving examples).
    • With the increased market share price and output may be more easily controlled - but beware of MMC (mention main acts - 1948, 1956, 1965, 1973 and 1980).
    • A defence against takeover from someone else.
    • Helps compete against imports.
    • Allows company to break into foreign market and escape for example, EEC tariffs.
    • Enables company to take advantage of low price of another company (this applies more to takeovers eg. Guinness and Distillers). (Depending on time, a monopoly diagram showing restriction of output would help).
    • h. Problems include:-

      • : If market is static if the merged company now dominates the market it may find its growth rate limited to that of the market.
      • : Diseconomies of scale
      • : Abuse of market power owing to concentration

  6. Reasons for vertical:-

    (in the main see previous essay)

    Reasons include:-

    • Control supply and minimise risks of supply shortages owing to policies outside the firm's control eg. import controls.
    • Enables planning of production, costs.
    • Improves communication from consumer to manufacturer
    • Efficiency gains from rationalising production and distribution in a (now) common organisation
    • Control of supply may act as an entry barrier
    • Can raise raw material price to competitors whilst maintaining a low transfer price to itself thus giving an advantage in the final product market
    • Firm can now operate in both industrial and consumer markets (forward vertical).

  7. Reason for conglomerate/diversifying:-

    • Present market is saturated - new market can be satisfied using existing administrative back-up.
    • May be high-risk if outside existing marketing and technological experiences.
    • Spreads risk.
    • Opportunity to offset cyclical sales patterns in current markets by diversifying into a product market that has a complementary product cycle eg. ice cream and sausages (Walls).
    • Financial strength should put diversifying company in an advantageous situation in new market - expensive promotion campaigns, price cuts subsidised from profitable other markets thus driving out existing competition. In 1986 Virgin Record Company were approached by the author with the idea of setting up a Secretarial College - called "Virgin Secretaries". The idea was not acknowledged - IF Virgin had come into the market their financial backing would easily have enabled them to break into the market - not to mention the publicity surrounding such a business venture - can you imagine the 'Sun' headlines!!!
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