Business integration links an organization’s systems together to generate greater efficiency. It is a strategy implemented by many businesses to synchronize or align with other companies that will help them achieve their goals. This also contributes to their growth by adopting new practices and functions. A company should be careful before executing this strategy because if the proper one is not adapted then the company runs the risk of affecting the business more.
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Horizontal vs Vertical Integration
Why Should Your Business Integrate?
Integration is a catalyst for growth. It encourages a company to stay ahead of their competition and decrease significant cost and energy consumption and eliminate the gaps between several business functions.
Outdated information leads to untimely decisions that may cause your business to suffer. When your reports are not up to date, it may take hours to scour through the sales, finances and service departments to analyze the data. Integration encourages a centralized data system that increases the accessibility of data and improves real-time visibility. This allows the company’s executive board to evaluate its business before making any decisions. A centralized system decreases time-consuming tasks and incorrect data analysis.
All your employees can easily access the data in your system. This will not only improve the communication streamline between you and employees. But also the rest of the stakeholders of your company. Your company can now disseminate information with little cost or time.
Productivity, Sales and Growth:
The departments of your company will no longer need to wait for data to be distributed from different places. By removing this benign task of collecting data, your employees can now utilize their time focusing on their work. This leads to improved job satisfaction and productivity. An integrated system also allows you to meet all the needs of your customers. This boosts sales and customer relations which in turn lead to robust growth.
What Are the Types of Integration?
There are typically two types of integration strategies- vertical and horizontal integrations. A vertical market is where all your consumers are in one particular industry. Whereas, in the horizontal market, your customers use your product to do the same thing in various industries.
Horizontal integration allows your company to take over another that operates at the same level or produces the same product. While vertical integration allows your company to acquire a business with the same production vertical.
Vertical Market and Integration
A vertical market includes a group of businesses that often compete against each other in the same industry and cater to a specific audience. Your company may adopt the vertical integration strategy to take complete control over all the stages in the production and distribution of a good.
You may choose to adopt this strategy to reduce costs, to strengthen their supply chain and to access new distribution channels. This process also pinpoints the costs a company faces during transportation and helps eliminate them. Your company may integrate into two ways- backward or forwards.
takes place when you decide to take over your suppliers that produce the raw material or input products for your goods. For example: If you own a computer manufacturing company, you may acquire a business that produces chips. This brings a steady flow of supply that ensures all the production is going smoothly.
Is when your company acquires a business ahead of its supply chain. For example, your computer manufacturing company decides to take control of a retailer shop. This allows you to understand your customer needs and bridge the gap between them.
Merits of Vertical Integration:
This strategy decreases transportation costs and time spent on delivering. It improves the supply chain and distribution process and permits your company to achieve economies of scale by increasing profits and decreasing production costs. Your business also makes itself a strong competitor by taking hold of the suppliers and then the distributors.
Demerits of Vertical Integration:
Taking over the suppliers is a costly process and may affect your business in the short run. Vertical integration builds a long chain of command that is difficult to maintain with absolute efficiency.
Horizontal Market and Integration
A common demographic feature can be found in all the businesses in a horizontal market and it can market its products to the general population instead of a specific one. A company that adopts horizontal integration acquits businesses that are on the same level as them in a similar or different industry.
A company may choose to undergo this strategy to expand its size, diversify its products or services, gain more customers, achieve economies of scale and eliminate competition. A successful horizontal integration generates more revenue as a merged company can cut down its cost by sharing its production facilities and distribution strategies.
Merits of Horizontal Integration:
Horizontal integration combines the value of two companies that will result in higher performance. In other words, you can form a synergy with other companies. You can then invest in research and development that will allow you to diversify your products and increase its value. But the main incentive for firms to merge is that it eliminates competition from companies of your own standing or potential new entrants.
Demerits of Horizontal Integration:
There is no guarantee that your synergy will yield positive results. If your company becomes too large then the overall productivity will decrease. Different companies have different operating styles and work culture and you may not be able to control those employees with your leadership style.
You have to consider your company characteristics and culture before investing in any form of integration. Your choice heavily relies on whether you wish to achieve economies of scale, larger market share, increased synergy or product diversification too.