Market Integration

 Integration shows the relations of the firm in a market. The extent of integration the conduct of
the firms and consequently their marketing efficiency.
 Khols and uhl have defined market integration as a process which refers to the expansion of
firms by consolidating additional marketing functions and activities under a single
management.

Types of Market Integration

1. Horizontal integration
2. Vertical integration
3. Conglomeration

Horizontal integration

 This occurs when a firm or agency gains control of other firms or agencies performing similar
marketing functions at the same level in the marketing sequence.
 In this type of integration, some marketing agencies combine to form a union with a view to
reducing their effective number and the extent of actual competition in the market.
 It is advantageous for the members who join the group.
 In most markets, there is a large number of agencies which do not effectively compete with
each other.
 This is indicative of some element of horizontal integration.
 It leads to reduced cost of marketing.
 In this reduced competition possible.

PARENT AGRIBUSINESS FIRM

FIRM A FIRM B FIRM C FIRM D

Effects of horizontal integration

 Buying out a competitor in a time bound way to reduce competition.

 Gaining larger share of the market and higher profits.
 Attaining economies of scale (a proportionate saving in costs gained by an increased level of
production) specializing in the trade.

Advantages of horizontal integration

 Lower costs.
 Higher efficiency
 Increased product differentiation
  Increased market power.
 Reduced competition
 Access to new markets.
 Economics of scale.
 Economics of scope. (A proportionate saving gained by producing two or more distinct
goods, when the cost of doing so is less than that of producing each separately.)
 International trade.

Disadvantages of horizontal integration

 Destroyed value.
 Legal repercussions. (An unintended consequence of an event or action.)
 Reduced flexibility.

Vertical Integration

 This occurs when firm performs more than one activity in the sequence of the marketing
process.
 It is a linking together of two or more functions in the marketing process within a single firm or
under a single ownership.
 This type of integration makes it possible to exercise control over both quality and quantity of
the product form the beginning of the production process until the product is ready for the
consumer.
 It reduces the number of middle men in the marketing channel.

Arrangement of vertical integration

(PARENT AGRI BUSINESS FIRM)

Wholesaling of feed Feed mill Transport agency Foodgrains trade

1. Forward integration – if a firm assumes another function of marketing which is closer to the
consumption function, it is a case of forward integration. (Example) wholesaler assuming the
function of retailing.
2. Backward integration – This involves ownership or a combination of sources of supply.
(Example) when a processing firm assumes the function of assembling/purchasing the produce
from the villages.
3. Balanced Vertical integration – The third type of vertical integration is a combination of the
backward and the forward vertical integration.
 Advantages of vertical integration

 It allows to invest in assets that are highly specialized.

 It gives more control over business.
 It allows positive differentiation.
 It requires lower costs of transaction.
 It offers more cost control.
 It ensures a high level of certainty when it comes to quality.
 It provides more competitive advantages.

Disadvantages of vertical integration

 Capacity-balancing problems.
 Bring about more difficulties.
 Results in decreased flexibility.
 Create some barriers to market entry.
 Cause confusion within the business.
 Requires a huge amount of money.

Effects of vertical integration

 More profits by taking up additional functions.

 Risk reduction through improved market coordination
 Improvement in bargaining power and the prospects of influencing prices.
 Lowering costs through achieving operational efficiency.

Conglomeration

A combination of agencies or activities not directly related to each other may, when it operates under a
unified management, be termed a conglomeration.

AGRI-BUSINESS CONGLOMERATE

(FOOD GRAINS TRADE) (FRUIT PROCESSING UNIT) (RETAIL/CHAIN) (CLOTH MILL) (SALES REPAIRS OF
ELECTRONIC GOODS) (MANUFACTURE OF VANASPATI)

Effects of conglomeration

 Risk reduction through diversification

 Acquisition of financial leverage
 Empire building urge.
 Reasons for market integration

 To remove transaction cost foster competition

 Provide better signals for optimal generation and consumption decisions.
 Improve security of supply

Degree of integration

 Ownership integration – This occurs when all the decisions and assets of a firm are completely
assumed by another firm. (example) A processing firm which buys a wholesale firm.
 Contract integration – This involves an agreement between two firms on certain decisions,
while each firm retains its separate identity. (example) tie up of a dhal mill with pulse traders for
supply of pulses.