Business Organisation and Policy Essay Example | Topics and Well Written Essays - 2250 words

Business Organisation and Policy - Essay Example Moreover, if any firm buys or merges with any other firm which is at a different level of the value chain and the chain of production, it will be called vertical integration. There are two types of vertical integration namely: Backward vertical integration and forward vertical integration. Backward integration occurs when a firm merges with or takes over firms at an earlier level of the chain of production than itself. For example, when a big retail store such as Wal-Mart, purchases a factory or plant which processes and produces frozen food, it would be called backward vertical integration as Wal-mart is ensuring a stable and secure supply of frozen food. Backward vertical integration is helpful where the suppliers have a stronger network and a stronger negotiating power in the industry. On the other hand, forward vertical integration occurs when firms take over or merge with firms which are at a later level of the value chain of production. For example, if a raw material supplier b uys a factory or when a clothes manufacturer opens up a retail outlet, it will be called forward vertical integration. Forward vertical integration opens doors of a steady revenue stream for firms. ... ADVANTAGES OF HORIZONTAL INTEGRATION When a firm expands horizontally, it is likely to experience economies of scale from the increased output. Firms can increase their profitability as per unit cost decreases with the increased level of output. For example, if a huge retail store merges with another chain of retail store, it can achieve economies of scale in the form of more discounts from manufacturers owing to bulk purchasing. As the store would now technically be purchasing close to twice as much as it did before under one umbrella, it would receive large discounts from manufacturers as well. Similarly, if a manufacturing firm merges with another, not only this would be the merger of capital, assets and liabilities, but also the firm would now share each other’s competencies and specialties. This might even include more cost-efficient production processes, vendor relationships, discounts on bulk purchase of raw materials etc. Besides this, the business would also expand on its geographical reach to the market. For example, when the Royal Bank of Scotland merged with Faysal Bank in Pakistan, all of Royal Bank of Scotland’s network of branches and accounts spread throughout Pakistan came under Faysal Bank’s control and brand name. Unilever’s taking over of Polka ice-cream in Pakistan is another example of geographical expansion through horizontal integration. This gave them an easy access to the market of Pakistan. However, as opposed to vertical integration, firms might enter into businesses which are out of the scope of their operations and specialization. This could misallocate resources into less profitable ventures if not unprofitable and even lead to money being drained on the