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Vertical Integration VS Horizontal Integration or Economies of Scale VS. Economics of Scope

Assignment Brief

Please write a 5 – 7 page essay with the following specifications:

  • Typed – Double spaced
  • Font – Times New Roman, Size 12
  • Margins – 1 inch (top, bottom, right and left)

The paper should consist of the following:

  • A discussion on your selected topics covering the main points. 
  • Atleast one news article related to each chosen topic, showing the application of the concept in the real world. You can easily find such news articles on google. 
  • Write in your own words what you’ve understood from the articles and how this relates to what you have learned in the Managerial Economic Class. 
  • Print the articles and staple along with your paper. The articles will not be included in the page count.

Other Requirements: 

  • Title of the paper and Your Name (Top corner of the first page)
  • References (These should be on the last page of the assignment)

Sample Answer

Introduction

In the business world, companies grow and gain competitive advantages through various strategies. Two important growth strategies are Vertical Integration and Horizontal Integration. These methods are widely used to improve market position, control costs, increase efficiency, and gain access to resources or new markets. In this essay, I will explore both types of integration, their advantages and disadvantages, and support the discussion with real-world examples from news articles.

What is Vertical Integration?

Vertical integration is a business strategy where a company expands its operations into different stages of the same production path. For example, a car manufacturer may acquire a tire company (backward integration) or open retail stores to sell its cars (forward integration).

Benefits of Vertical Integration:

  • Reduces dependency on suppliers

  • Improves coordination across the supply chain

  • Increases control over production and quality

  • Potential cost savings in the long run

Disadvantages:

  • Requires large capital investment

  • Increases operational complexity

  • Less flexibility if market conditions change

What is Horizontal Integration?

Horizontal integration occurs when a company acquires or merges with another company at the same level in the supply chain. This usually means buying out competitors to increase market share.

Benefits of Horizontal Integration:

  • Reduces competition

  • Increases market power and economies of scale

  • Expands product offerings and customer base

Disadvantages:

  • May attract regulatory scrutiny for monopoly

  • Integration challenges, such as culture clashes

  • Higher risk if the market weakens

Real-World Example of Vertical Integration

News Article:

Amazon opens its own cargo airline fleet to reduce delivery time
(Source: CNBC, 2022)

Amazon’s move to expand its air cargo business is a perfect example of forward vertical integration. Instead of relying on third-party logistics companies like FedEx or UPS, Amazon decided to manage its delivery operations internally. This gives them more control over the shipping process, improves delivery times, and saves money.

My Understanding:

From this article, I understood that vertical integration can help a company improve customer service and reduce costs. It also shows how companies like Amazon want to control more parts of their supply chain to increase efficiency. In class, we learned that vertical integration can reduce transaction costs and dependency on external suppliers, which is what Amazon is doing here.

Real-World Example of Horizontal Integration

News Article:

Disney Acquires 21st Century Fox for $71 Billion
(Source: BBC News, 2019)

Disney’s acquisition of 21st Century Fox is a prime example of horizontal integration. Both companies were in the entertainment industry, producing movies and TV shows. This merger allowed Disney to expand its content library and strengthen its position in the streaming business, especially to compete with Netflix.

My Understanding:

This article made me realize that horizontal integration helps companies grow rapidly by acquiring competitors. By buying Fox, Disney gained access to more intellectual property and expanded its market share. In class, we discussed that such mergers can lead to economies of scale, which reduces average costs as the company grows, exactly what Disney aimed to do.

Comparison of Both Strategies

FeatureVertical IntegrationHorizontal Integration
Purpose Control supply chain Expand market share
Example Amazon Air Disney–Fox Merger
Risk High investment risk Monopoly concerns
Benefit Improved efficiency Economies of scale

Both strategies have their benefits depending on the company`s goals. Vertical integration is useful when control and efficiency are needed, while horizontal integration is powerful when a company wants to dominate the market.

Continued...


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