Industrial Integration: Forms, Advantages and Disadvantages

Industrial integration is the merger or collaboration of two or more companies to create a larger and more economically stable entity.

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Industrial integration is the merger or collaboration of two or more companies to create a larger and more economically stable business entity.

Reasons for Industrial Integration

Companies merge forces with the aim of combatting economic recession and maintaining monopoly advantages, amongst many other reasons. Here are some of the reasons for industrial integration:

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  1. Combatting Economic Recession: Firms often integrate to withstand economic downturns and stabilize their operations.
  2. Monopoly Advantages: The aspiration to gain the benefits of a monopoly drives firms towards integration.
  3. Maintaining Stable Prices: Integration can assist in controlling and stabilizing prices within the market.
  4. Direct Raw Material Access: Obtaining raw materials directly from the source is a motivation for integration.
  5. Competition Control: Integration can be a strategy to manage or eliminate competition within an industry.
  6. Cost Reduction and Profit Increase: Combining forces helps in reducing production costs, thereby enhancing profitability.
  7. Achieving Large-Scale Production: Integration aims to achieve economies of scale by enabling large-scale production capabilities.

Forms of Industrial Integration

Industrial integration can come in various forms, each with its own distinct purpose. Itemized below are the types of industrial integration you need to know about:

  1. Cartel (Kartel): This is a voluntary association of independent producers of similar commodities aimed at controlling both price and output. A classic example is OPEC (Organization of the Petroleum Exporting Countries).
  2. Trust: This involves integrating competing firms from different business lines under a single control with the objective of coordinated operations.
  3. Holding Company: A parent or holding company holds a significant portion of shares in other companies. This allows it to exercise control over the companies.
  4. Price Rings: These are agreements among competing firms producing similar products to fix uniform prices for their products.
  5. Syndicate: A syndicate is an association of producers of similar products, sometimes structured as a joint-stock company resembling a cartel.
  6. Amalgamation/merger: This is the joining or coming together of previously independent firms to form a unified entity.
  7. Horizontal Integration: This is when combining firms operate in the same line of business or at the same stage of the production process.
  8. Vertical Integration: This is when combining firms are operating in different lines of business or at different stages in the production chain. This strategy aims to streamline operations and control various aspects of production.
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Image by Gerd Altmann from Pixabay

Advantages of Industrial Integration

Industrial integration offers several advantages to the firms involved, some of which we have thoroughly examined:

  1. Control of Material Sources: Integration enables firms to gain control over their sources of materials. This ensures a steady and reliable supply chain.
  2. Cost-Effective Raw Material Acquisition: It allows for raw materials to be accessed at reduced prices due to bulk purchasing, which enhances cost efficiency.
  3. Increased Capital: The consolidation of firms often results in increased capital. This enables more significant investments and expansion opportunities.
  4. Economic Stability: Integration contributes to economic stability as it provides a buffer against market fluctuations.
  5. Reduced Production Costs: Streamlining operations leads to lower production costs and improves overall profitability.
  6. Bulk Purchasing Advantages: Integration facilitates bulk purchasing of raw materials and finished goods, resulting in cost savings and efficiency.
  7. Competition Deterrence: By consolidating forces, integration can discourage competition and provide a more controlled market environment.
  8. Waste Elimination: Integrated operations tend to eliminate waste. It optimizes resources and reduces inefficiencies.
  9. Output Control and Price Stability: Integration allows for better control of outputs and stabilization of prices within the market.
  10. Reduced Advertisement Costs: Shared resources and increased market presence through integration can reduce the need for extensive advertising expenditure.
  11. Economies of Scale: Integrated firms benefit from economies of scale. They enjoy cost advantages due to increased production levels.
  12. Prevention of Overproduction: Integration helps prevent overproduction by synchronizing operations and market demand.
Photo by Erol Ahmed on Unsplash

Disadvantages of Industrial Integration

While industrial integration offers various advantages, it also presents certain drawbacks that affect markets, consumers, and competition. Let’s delve into these demerits of industrial integration.

  1. Monopolistic Tendencies: Integration often leads to the creation of monopolies, thereby limiting market competition and potentially harming consumer choices.
  2. Lack of Specialization: Integration may discourage specialization as firms focus more on consolidating operations rather than refining specific skills or services.
  3. Forcing Firms Out of Business: Smaller or less integrated firms might struggle to compete. This might potentially lead to their closure or acquisition by larger integrated entities.
  4. Artificial Scarcity: Integrated firms might manipulate supply to create artificial scarcity, influencing prices to their advantage.
  5. Consumer Choice Restrictions: Reduced competition limits consumer choices and options available in the market.
  6. Reduced Availability and Inflation: Integration can reduce the quantity of goods available in the market. This potentially leads to inflation due to increased demand and limited supply.
  7. Impact on Product Quality: Absence of competition might lead to a decline in the quality of products or services, as there’s less pressure to improve or innovate.
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