Types of Market Integration

When two businesses are brought together through a merger or takeover, it is possible to define the
nature and type of integration based on the activities of each business and where they operate in the
supply chain of an industry.

The types of integration are illustrated in the diagram below:

The main types of integration are:

Backward vertical integration. This involves acquiring a business operating earlier in the supply chain –
e.g. a retailer buys a wholesaler, a brewer buys a hop farm.

Conglomerate integration. This involves the combination of firms that are involved in unrelated business
activities. Eg Nestle

Forward vertical integration. This involves acquiring a business further up in the supply chain – e.g. a
vehicle manufacturer buys a car parts distributor.

Horizontal integration. Here, businesses in the same industry and which operate at the same stage of
the production process are combined. (Riley 2018)
Pros and Cons of Each Type of Market Integration
The table below shows the advantages and disadvantages of each type of market integration.
Horizontal Integration
Advantages
Larger Market Share
Bigger Base of Customers
Increased Revenue
Reducing competition
Increasing other synergies such as
marketing
Creating economies of scale and
economies of scope
Reducing other production costs
Vertical Integration
Advantages
Decrease transportation costs and reduce
delivery turnaround times
Reducing supply disruptions from suppliers
that might fall into financial hardship
Increase competitiveness by getting
products to consumers directly and quickly
Lower costs through economies of scale,
which is lowering the per-unit cost by
buying large quantities of raw materials or
streamlining the manufacturing process
Disadvantages
Increasing the size of the company also
increases the size of the problems, bigger
companies are harder to handle
Does not always yield the synergies and
added value that was expected
Can even result in negative synergies
which reduce the overall value of the
business
Disadvantages
Companies might get too big and
mismanage the overall process
Outsourcing to suppliers and vendors
might be more efficient if their expertise is
superior
Costs of vertical integration such as
purchasing a supplier can be quite
significant
Increased amounts of debt if borrowing is
needed for capital expenditures
 Improve sales and profitability by creating
and selling its own brand

Conglomerate Integration

Advantages Disadvantages

Through diversification, the risk of loss
lessens.
An expanded customer base
Cross-selling of new products, leading to
increased revenues.
The new firm benefits with increased
efficiencies with the merged company.
Diversification can shift focus and
resources away from core operations,
contributing to poor performance.
If the acquiring firm is inadequately
experienced in the industry of the
acquired firm, the new firm is likely to
develop ineffective corporate governance
policies and an inexperienced,
underperforming workforce.

It can be challenging for firms to

successfully develop a new corporate
culture

Global Corporations

from lumenlearning.com

A global company is generally referred to as a multinational corporation (MNC). An MNC is a company

that operates in two or more countries, leveraging the global environment to approach varying markets
in attaining revenue generation. These international operations are pursued as a result of the strategic
potential provided by technological developments, making new markets a more convenient and
profitable pursuit both in sourcing production and pursuing growth.

International operations are therefore a direct result of either achieving higher levels of revenue or a
lower cost structure within the operations or value-chain. MNC operations often attain economies of
scale, through mass producing in external markets at substantially cheaper costs, or economies of scope,
through horizontal expansion into new geographic markets. If successful, these both result in positive
effects on the income statement (either larger revenues or stronger margins), but contain the innate risk
in developing these new opportunities. As gross domestic product (GDP) growth migrates from mature
economies to developing economies, it becomes highly relevant to capture growth in higher growth
markets.

However, despite the general opportunities a global market provides, there are significant challenges
MNCs face in penetrating these markets. These challenges can loosely be defined through four factors:

Public Relations: Public image and branding are critical components of most businesses. Building this
public relations potential in a new geographic region is an enormous challenge, both in effectively
localizing the message and in the capital expenditures necessary to create momentum.

Ethics: Arguably the most substantial of the challenges faced by MNCs, ethics have historically played a
dramatic role in the success or failure of global players. For example, Nike had its brand image hugely
damaged through utilizing ‘sweat shops’ and low wage workers in developing countries. Maintaining the
highest ethical standards while operating in developing countries is an important consideration for all
MNCs.

Organizational Structure: Another significant hurdle is the ability to efficiently and effectively
incorporate new regions within the value chain and corporate structure. International expansion
requires enormous capital investments in many cases, along with the development of a specific strategic
business unit (SBU) in order to manage these accounts and operations. Finding a way to capture value
despite this fixed organizational investment is an important initiative for global corporations.

Leadership: The final factor worth noting is attaining effective leaders with the appropriate knowledge
base to approach a given geographic market. There are differences in strategies and approaches in every
geographic location worldwide, and attracting talented managers with high intercultural competence is
a critical step in developing an efficient global strategy.

Combining these four challenges for global corporations with the inherent opportunities presented by a
global economy, companies are encouraged to chase the opportunities while carefully controlling the
risks to capture the optimal amount of value. Through effectively maintaining ethics and a strong public
image, companies should create strategic business units with strong international leadership in order to
capture value in a constantly expanding global market. (Lumen Learning “Global Corporation,” 2019)