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Vertical Integration

It is also known as sequence or industry or process integration. It arises as a result of integration of those business enterprises which are engaged in different stages of production of a product. In other words, it implies combination under single control of enterprises in different stages of manufacturing the product.

The aim of vertical integration is to gain self-sufficiency as regards raw-materials and distribution of finished products. Two or more business units engaged in successive stages of production, or producing articles leading to the same final products, may combine together and manage all stages of production and the distribution of the final product. For example, in cotton textile industry, there may be a combination of units engaged in successive stages of cloth manufacturing such as spinning, weaving, bleaching and finishing of cloth.

Vertical Combination

Vertical integration is a means to achieve internal and external economies of production and distribution. These economies arise because of control over the sources of raw material and/or control over the market. Internal economies arise from cheaper procurement of raw materials, large scale production and efficient use of funds. External economies arise because of savings in storage and transport and large scale marketing of products. Raising of funds from the capital market is also cheaper for a big firm. The basic objective of vertical combination is either to secure an assured supply of raw material and other requirements, or to create steady market for the products manufactured. The former objective is fulfilled by backward integration and the latter is realized by forward integration.

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