Classic examples of vertical integration, which ties all economic ties within one market segment, are companies - Interros and LUKoil (see Fig. 30.1). With a horizontal scheme, the holding unites homogeneous productions (see Fig. 30.2). It offers the market a wide product line and already dictates its own rules in this area. The classic examples of such holdings are the Bolshevik, Krasny Oktyabr, and Yukos concerns.

The brightest Russian example vertical integration is the oil complex, in the process of restructuring which it was decided to form vertically integrated oil companies covering all stages of oil production and refining and marketing of petroleum products - from geological exploration to the sale of gasoline at gas stations. To date, 16

Examples of vertical integration are

All of these companies have taken their manufacturing to the next level, making major capital investments in labor and technology, and carefully crafting key infrastructure strategic decisions, including vertical integration and specialization of manufacturing, for example. In this chapter, we will discuss the process of developing manufacturing strategies and the role they play in improving competitiveness.

An example of Japanese oil refineries. These companies did not take any part in the activities of oil companies, so their financial position was largely dependent on crude oil prices, changes in exchange rates, demand and supply of petroleum products. Only those Japanese oil companies, which are subsidiaries of foreign oil producers, have demonstrated relative stability due to a high degree of vertical integration.

Give examples of vertical and horizontal integration.

Let's illustrate what has been said with an example. Let's say that direct vertical integration is chosen as a development strategy, and within the framework of this strategy, it is supposed to acquire retailers. In order to include new stores in the company's management system, a number of programs must be developed

Here are some typical examples of vertical Japanese industrial integration.

They say that in Russia there is an excess of processing capacities. But it was like that before. Today there is no surplus, because we have adjusted the capacity to the needs that the state had for these 10 years of 160-170 million tons per year. As long as there was no economic growth, everything was fine. But during the economic recovery, when the consumption of gasoline, electricity, diesel fuel and our other products is growing sharply, we are faced with a shortage, first of all, of light oil products. We are all now increasing the depth of processing, but this takes time. Not enough power. Here, for example, the NORSI plant. It is not included in the structure of any VIOC and does not use its potential. In Angarsk, the plant practically stopped. And there are a number of similar enterprises for which no one is responsible and which, therefore, are also idle. And to top it all - the growth of export duties. Today we have increased the capacity of both NORSI and the Moscow Oil Refinery. Vertical integration is necessary for what To have a close relationship between oil production, its processing and sale. There was a problem in Komi - the Ukhta plant was not functioning. Today it is loaded with the capacity that allows it to work efficiently. The same with the Perm, Volgograd, Ryazan plants. The inclusion of individual refineries in the VIOC is a real way to solve the pressing problems of oil refining.

Diversification involves the activities of the firm in the markets different goods, which are not close substitutes, in contrast to vertical integration, which involves the release of one product. An example of a diversified manufacturing business is a refrigerator manufacturing company that produces one-

A firm can benefit from vertical integration by investing in other market-oriented or supply-oriented countries. However, in Lately there were more examples of supply-oriented investments raw materials from other countries than vice versa. This is due to the growing dependence of developing countries on raw materials and the lack of funds from firms in these countries for significant investments abroad.

Germany was the only European country where late XIX V. there was a modernization of the enterprise management system. On the eve of 1900, a significant number of large companies diversified their activities and carried out vertical integration. Focusing on the American model, many of them adopted the strategy of organizing multiple divisions. On the eve of the First World War, such an organization, for example, was owned by the Siemens company10.

EXAMPLES OF VERTICAL INTEGRATION 5.3.1. Toyota motor company

We mentioned that when using vertical integration, especially quasi-integration, adaptation to technological change can be accelerated because the leading company gets the opportunity to plan and manage changes. good examples this is given by Seiko and Toyota. On the other hand, if investments in certain technologies are high, vertical integration can become a conservation factor. Not-

Diagonal integration - integration with a company located at a different level of the vertical production cycle and producing paraplene types of products. An example of diagonal integration would be the acquisition of a motorcycle and motorboat engine plant by an automobile manufacturer.

Long-term contracts differ in terms of the degree and density of emerging economic relations from the quasi-firm. The lowest step is a long-term contract, which preserves the full independence of the parties. The next step is long-term contracts with vertical restrictions. An example is the franchising system, which is widely used in the retail trade in cars, gasoline, and other goods. Let's say an automobile company grants the right to sell its branded products in a certain area to a special dealer. Although the dealer does not lose the status of an independent company, at the same time he is forced to comply with a number of restrictions set by the supplier and submit to his control. As a result of such not complete, but partial vertical integration, a quasi-firm is formed.

Technologies, competencies, etc. in the chain of processes for the production of goods or services (direction to suppliers of raw materials - back; direction to consumers - forward). Vertically integrated holdings are controlled by a common owner. Typically, each holding company produces a different product or service to meet common needs.

For example, in modern agriculture in most cases, there is such a chain: the collection of the product, its processing, sorting, packaging, storage, transportation and, finally, the sale of the product to the end consumer. A firm that controls all or some of the links in such a chain will be vertically integrated. Vertical integration is the opposite of horizontal integration. A monopoly created through vertical integration is called a vertical monopoly.

Three types

Vertical integration forward

A company vertically integrates forward if it seeks to gain control over companies that produce a product or service that is closer to the end point of the product or service being sold to the consumer (or even a subsequent service or repair).

Balanced vertical integration

A company pursues balanced vertical integration if it seeks to gain control over all companies that provide the entire production chain from the extraction and / or production of raw materials to the point of direct sale to the consumer. In developed markets, there are effective market mechanisms that make this type of vertical integration redundant: there are market mechanisms for controlling subcontractors. However, in monopolistic or oligopolistic markets, companies often seek to build a complete vertically integrated holding.

Notes

Wikimedia Foundation. 2010 .

See what "Vertical Integration" is in other dictionaries:

- (vertical integration) The combination in one firm of two or more stages of production, usually under the control of separate firms. Vertical integration may include forward integration, which completes technological process(For example,… … Economic dictionary

Production and organizational association of enterprises connected by common participation in the production, sale, consumption of a single final product. Vertical integration covers material suppliers, component and part manufacturers,… … Financial vocabulary

See Vertical integration Glossary of business terms. Akademik.ru. 2001 ... Glossary of business terms

vertical integration- An arrangement where the same company owns all the various aspects of the production, sale and delivery of a product or service. In the electric power industry, this refers to the historically common arrangement whereby a utility… … Technical Translator's Handbook

Vertical integration- VERTICAL INTEGRATION The company's specialization in a number of successive stages of product production. Vertical integration can be regressive (see Backward integration) or progressive (see Forward integration). Across the industry... ... Dictionary-reference book on economics

vertical integration- stačioji integracija statusas T sritis radioelektronika atitikmenys: engl. vertical integration vok. Vertical integration, f rus. vertical integration, f pranc. integration verticale, f... Radioelectronics terminų žodynas

Combining into a single technological process all or the main links of production and circulation, from growing with. X. products before sale finished products under the control of one center of industrial, banking or commercial monopoly. ... ... Great Soviet Encyclopedia

Production and organizational association, merger, cooperation, interaction of enterprises connected by common participation in the production, sale, consumption of a single final product: suppliers of materials, manufacturers of components and parts, ... ... Encyclopedic Dictionary of Economics and Law

VERTICAL INTEGRATION- intersectoral cooperation and combination of enterprises and production in decomp. industries x VA, providing optimal. the passage of the commodity mass in a single technol. process from one production phase to another. According to the objective function, 2 subsystems are distinguished V. ... ... Agricultural Encyclopedic Dictionary

Vertical integration- association of a group of enterprises that carry out successive stages of production of finished products and are the property of one company ... Dictionary of economic terms and foreign words

Books

• Vertical Integration and Vertical Constraints in Industry, A. Ya. Butyrkin. The monograph examines the theoretical and practical problems of one of the forms of economic organization - vertical integration and vertical restrictions. Theoretical aspects…

Thus, such well-established industries as automotive, aircraft, oil, etc., provide an excellent opportunity to use all the “pluses” of vertical and horizontal integration. These industries have accounted for most of the mergers and acquisitions in recent years.

We must complete our consideration of the problem of the fundamental transformation of market relations into intracompany relations by analyzing the role of technological and other factors in this process, which will be the subject of the next part of the work.

2.2 THE CONCEPT OF HORIZONTAL INTEGRATION

Horizontal Integration- the unification of enterprises, the establishment of close interaction between them “horizontally”, taking into account the joint activities of enterprises producing homogeneous products and using similar technologies.

horizontal integration. Most typically, a horizontal integration strategy occurs when a firm acquires or merges with a major competitor or a company operating at a similar stage in the value chain. However, two organizations may have different market segments. Consolidation of market segments as a result of a merger gives the company new competitive advantages, and in the long run promises a significant increase in income. There are a number of characteristic reasons that contribute to the choice of a horizontal integration strategy, among them we note the following:
horizontal integration may be related to the growth characteristics of the manufacturing industry (eg, rapid growth);
increased economies of scale due to mergers can enhance core competitive advantages;
the organization may have an excess of financial and labor resources, which will allow it to manage an expanded company;
bundling can be a means of eliminating a close substitute product;
the competitor they want to buy may have a significant shortage of financial resources.

2.3 THE CONCEPT OF VERTICAL INTEGRATION

Vertical integration- production and organizational association, merger, cooperation, interaction of enterprises related by common participation in the production, sale, consumption of a single final product: suppliers of materials, manufacturers of components and parts, assemblers of the final product, sellers and consumers of the final product.

Vertical integration refers to that part of the added value that is produced under joint ownership. The price of the item being sold will most likely include the cost of materials, components, and systems. The high purchase price of these investments means a low level of integration. If the bulk of the total sales value is generated within one organization, the level of integration will be high. The concept of horizontal integration is used much less frequently these days and refers to the use of a wide range of products in order to maximize customer satisfaction.

Vertical integration is the process of replacing market transactions with intra-corporate transactions, resulting in a planned economy in which suppliers enjoy a monopoly position and consumers simply have no other choice. Vertical integration, like diversification, was once very popular in the management of commercial organizations, but the peak of this popularity passed a few decades ago. A classic example is Singer, an American sewing machine company that at some point integrated all of its operations from primary sources of raw materials (forests and iron mines) to finished sewing machines.
Vertical integration in a company is closely related to outsourcing and make-or-buy analysis, and raises philosophical questions such as “Did Ronald Coase get Nobel Prize in 1992?" or “where does the company start and end, and why?”.
Experience shows that a low level of competition leads to a high level of integration, i.e. diversification. Those countries of the world where competition was at a low level experienced too much influence of the planned economy to be competitive in the modern world with its globalization. This led to a thorough review of the entire business chain and, as a result, consideration of the possibilities of outsourcing. As a result, traditional value chains were broken and new companies were created. At the same time, the performance of older companies was declining. The production of components and the supply of auxiliary systems in the telecommunications industry was outsourced to specialized companies whose main activity was the production of electronics.
Most industries are already in a phase of de-integration, where they produce fewer finished products themselves and buy more components from third-party suppliers.
In theory, all functions can be performed by separate companies. We can distinguish the computer department, factory, sales company and other parts of the management apparatus. The decision to vertically integrate essentially involves choosing between producing goods and/or services yourself or buying them from someone else.
Gradually, the shortcomings of advanced vertical integration came to light. The high level of vertical integration became a problem and an object of struggle for Mikhail Gorbachev in the Soviet Union, and this is a similar problem for all traditional airlines. The largest European companies have always been relatively free from the tensions of competition, and, accordingly, they were characterized by a high level of vertical integration. Competing with newcomers like Ryanair or Easy.Jet, older companies have faced challenges not only with their cost structures but also with advanced vertical integration. These companies did their own engine maintenance, cleaned their own aircraft, managed their own ground support and cargo handling services, etc., which of course led to a number of intermediary deals.
Centralized organizations are characterized by excessive faith in their own abilities, which is expressed in the desire to do everything on their own. In contrast, more entrepreneurial organizations tend to make the whole chain more efficient by purchasing the goods and services they need from other companies. The following are the negative features of advanced vertical integration:
1. It eliminates market forces, and with them the possibility of correcting unnecessary transactions.
2. It makes subsidies attractive, which distorts the picture of competition and distorts the question of the company's raison d'être.
3. It creates a deceptive sense of power that does not correspond to the realities of the free market.
4. It creates an interdependence that can lead to the collapse of any of the functions involved if one of them finds itself in a difficult situation.
5. The closed market it organizes (guaranteed distribution channels) lulls the company's vigilance and creates a false sense of security.
6. A false sense of security dulls the will and ability of an organization to compete.

Many examples of vertical integration are based on misconceptions and self-deception. The most common misconception is the belief in the possibility of eliminating competition in a single link in the production chain with the help of its control. Some of the illusions that prevail in the world of vertical integration are listed below:
- Illusion 1: a strong market position at one stage of production can be transformed into a strong position at another.
This assumption has often led to poor investment decisions in the activities of the Swedish Consumers' Cooperative* and other conglomerates, which have subsequently been affected by the above deficiencies.
- Illusion 2: business transactions that do not go beyond one firm exclude the participation of sales agents, simplify the management process and thus make transactions cheaper.
This is nothing less than the classic creed of all adherents of the planned economy, who consider centralized control to be the only right way, and the free market as worthy of anathema.
- Illusion 3: We can resurrect a strategically weak unit by buying out the unit that follows it in the production chain, or the unit that precedes it.
This is possible in rare cases. The logic of each industry must be judged by its own indicators. This rule applies here as well, with the exception of situations of diversification in order to spread risks.
- Illusion 4: Industry knowledge can be used to achieve competitive advantage at the stages of both preceding and subsequent operations.
It is worth taking a closer look at the potential benefits and making sure that this logic does not mislead the pass.
There are many examples of amazing profitability gains achieved by breaking down vertically integrated structures. Perhaps it is for this reason commercial organizations generally moving towards a lesser level of integration. Car manufacturers with their own supply chains do not supply their cars to export markets at a lower cost than those using independent supply companies. They also make their own gearboxes at no less cost than the companies specializing in the production of gearboxes.
One of the reasons why vertical integration was so popular in the technocratic era is the obvious economies of scale that were tangible and measurable, as opposed to the benefits of small scale, such as entrepreneurial spirit and competitive energy, that cannot be quantified.

In certain specific situations, vertical integration also has a positive side, especially when control of key resources allows achieving competitive advantages.
Some are listed below:
- higher level of coordination of operations with better control capabilities
- closer contact with end users due to vertical integration
- creating stable relationships
- access to technical know-how relevant to the industry
- confidence in the supply of necessary goods and services.
The integration of the travel company VingrevSor into the hospitality business by creating holiday villages in tourist resorts is an example of growth from package sales to holiday accommodation, a move that was seen as a likely strategic advantage.
SAS has also invested in hotels, and IKEA, with its backward integration from furniture sales to design and production planning, is balanced by a forward integration that leaves the last stage of production (furniture assembly) to the consumer.
Vertical integration is often based on self-admiration or excessive pride, so it is worth carefully considering your own internal motives.
Tired of the look of the kitchen? Want to change something? order kitchens to order on individual orders.

This strategy means that the company expands in the areas of activity related to the promotion of goods on the market, its sale to the final buyer (direct vertical integration) and related to the supply of raw materials or services (reverse).
Direct vertical integration protects customers or the distribution network and guarantees product purchases. Reverse vertical integration is aimed at securing suppliers who supply products at more low prices than competitors. Vertical integration also has a number of advantages and disadvantages, some of which are listed below.
Advantages:
There are new savings opportunities that can be realized. This includes better coordination and management, reduced handling and transportation costs, better use of space, capacity, easier collection of market information, reduced negotiations with suppliers, lower transaction costs, and the benefits of stable relationships.
Vertical integration should ensure that the organization delivers within tighter deadlines and, conversely, sells its products during periods of low demand.
It can give the company more room to participate in a differentiation strategy. This is because it controls a large part of the value chain, which can provide more room for differentiation.
This path allows you to resist the significant bargaining power of suppliers and buyers.
Vertical integration may allow a company to increase its overall return on investment if the proposed option offers a return greater than the company's opportunity cost of capital.
Vertical integration can have technological advantages in that the acquiring organization gains a better understanding of the technology, which can be fundamental to business success and competitive advantage.
Flaws:
Vertical integration tends to increase the proportion of fixed costs. This is due to the fact that the company must cover the fixed costs associated with backward or forward integration. The consequence of this increased operational dependency is that the enterprise's risk will be higher.
Vertical integration can lead to less flexibility in decision making due to changes in the external environment. This arises because the company's competitive advantage is related to the competitiveness of the suppliers or buyers included in the integration process.
It can also create significant barriers to exit, as it increases the degree of attachment of a company's assets. They will be much harder to sell in the event of a downturn.
There is a need to balance the initial and final stages of the main

Horizontal integration- It is an association of companies producing similar goods and services. The main goal here is to strengthen the position of the company by merging or acquiring competitors or establishing control over them in the form of a holding organization with a dominant role of one company. By expanding production, you get economies of scale. It is easier to expand the range of goods and services by concentrating resources.

Vertical integration- this is the inclusion in the company of new business structures that are part of the technological chain of the release of the main product. At the same time, the company can expand its activities towards suppliers (“backward”) or towards the final consumer of the product (“forward”). For example, a company building new plant for aluminum smelting, buys those enterprises that supply it with raw materials. The stability of the company is increasing. It forms the volume of supplies of raw materials and prices for it.

Agricultural enterprises choose forward integration by opening Retail Stores to sell their products.

Vertical integration allows you to expand the company's activities in all links of the technological value chain or take a position in its key links.

Many companies strive for vertical integration, but it is important for the company not to lose its specialization. Management may not be ready for good governance new technologically separate enterprises and their modernization, focusing on pricing and sales expansion.

The disadvantages of vertical integration, both “forward” and “backward”, include focusing only on one’s own sources of supply, when other, cheaper and better ones may appear, for example, high-quality plastics and ceramics instead of metal, gas for power plants instead of coal .

Forward and backward integration requires different skills and experience. The production of parts and components, assembly operations, wholesale and retail trade, direct sales via the Internet are different business areas with different key success factors. When manufacturers plan to integrate with wholesalers and retail, you need to weigh the cost recovery and take into account the time factor to gain the necessary experience.

Any integration reduces the flexibility of the company, increases the time to develop and bring new models to market. Required management decisions are often late.

The decision-making process itself takes time. It often happens that it is cheaper and faster to purchase parts and components from other companies than to carry out vertical integration.

Many automotive companies have found that purchasing most parts and components from specialized manufacturers often provides more high quality and lower costs than own production.

An integration strategy is justified when an enterprise can increase its profitability by controlling strategically important links in the value of logistics, production and marketing.

Example. Integration growth strategy

Integration is often done in practice. For example, in the Pyaterochka, Seventh Continent, and Eldorado chain stores, a mutually beneficial form of work with suppliers is practiced. The chains bear part of the costs of logistics and delivery of products, as well as the promotion of goods on the market, freeing the manufacturer from the difficulties associated with the marketing and advertising process. The manufacturer lowers its prices. As a result, the demand for cheaper products is growing, and sales are increasing.

The level of control the firm has over inputs and distribution of output. Explanation of Vertical Integration

What is Vertical Integration? Description

Vertical Integration is an approach for increasing or decreasing a firm's level of control over its inputs and output distribution.

Vertical integration is the extent to which an organization controls its inputs and distribution of its products and services. 2 types of vertical integration: reverse vertical integration and direct vertical integration. A firm's control over inputs or supplies is known as: Reverse vertical integration. A firm's control over distribution is known as: Direct vertical integration.

Vertical integration is most easily understood by applying the Porter Value Chain Model. Vertical integration refers to the degree of integration between a firm's value chain and the value chains of its suppliers and distributors.

Full vertical integration occurs when a firm incorporates a supplier and/or distribution channel value chain into its own value chain. This usually happens either when a firm acquires a supplier or distributor, or when a firm expands its operations. Extension operating activities means performing activities that were traditionally performed by suppliers or distributors. The lower level of vertical integration is commonly known as: Supply chain optimization or as: Supply chain planning. This happens when there is an exchange of logistical information between the firm and its suppliers and customers. See: Vendor Managed Inventory.

An example of vertical integration comes from the Airline industry. In the traditional role of travel agency agent, airlines have achieved direct vertical integration. In the same way, by fulfilling the role of suppliers, for example, aircraft maintenance and in-flight services, airlines have come to reverse integration. Another example is Companies in the oil refining industry that have traditionally had distribution channels such as petrol stations. Sometimes they expand into the field of oil exploration and production.

Origin of Vertical Integration. Story

The strategic rationale for choosing a vertical integration strategy has changed over time. In the 19th century, firms used vertical integration to achieve economies of scale. In the middle of the 20th century, vertical integration was used to secure a steady supply of important inputs. In some cases, transaction cost economics has been applied as a way to reduce overall costs. That is, it was cheaper for the firm to fulfill the role of a supplier and distributor than to spend time and money interacting with these parties.

Then, at the end of the 20th century, competition became more intense in most industries. Corporate restructuring has led to vertical disintegration with decreasing levels of vertical integration in large corporations.

Vertical disintegration is facilitated by the spread of the use of information and telecommunications technologies, which support lower transaction costs between market participants. Due to the fact that lower transaction costs can be achieved by using information technologies, compared with vertical integration, firms begin to vertically disintegrate. This effect is commonly known as Ronald Coase's Law of the Decreasing Firm. This law says that as operating costs decrease, firm size also decreases.

Application of Vertical Integration. Forms of application

Vertical integration decisions are usually made in the following contexts:

In the Strategy Development process, vertical integration can be seen as strategic choice. For example, if the suppliers are very strong, then the solution to this threat may be to buy several of them. When you analyze Industry Dynamics using Porter's 5 Forces Model, vertical integration is the act of reducing the bargaining power of suppliers and customers. Compare: Kraljic Model (Model Kraljic). Vertical integration can be a way to reduce transaction costs.

Stages in Vertical Integration. Process

When deciding whether to implement vertical integration, and to what extent, you should consider the following questions:

Are there economies of scale that will result in cheaper inputs and outputs for the firm? Whether there is a External factors market that will lead to more efficient inputs and outputs for the firm? Need for monopoly power?

Benefits of Vertical Integration. Advantages

Economies of scale. Consolidation savings. Cost reduction. Competitiveness. Reducing the threat from powerful suppliers and/or customers. Greater control over the entire value chain.

Limitations of Vertical Integration. Flaws

There is no absolutely integrated or absolutely non-integrated firm. Thus the task is not to choose between these 2 polar alternatives. Rather, it is the choice of the optimal degree of vertical integration. The degree of vertical integration is difficult to quantify. While Vertical Integration may solve one problem, a firm may already be acquiring a number of other companies. Compare Core Competence. Balancing between old and new operations can be quite difficult.

Assumptions of Vertical Integration. Conditions

The firm must have the competence to take over big role in the supply chain.