Vertical Integration and Economies of Scale
Vertical Integration and Economies of Scale
Vertical Integration
Vertical integration is the process where two businesses are merged together whereby the two businesses are at different levels of the production process. One may be at extraction stage, the other at processing stage. The process of merging firms where one is in front of the other in the production is called forward integration.
The benefit of the process of vertical integration underlies in the increased capacity of the company to control access to their inputs. This thus, allows these companies control the cost of the inputs, quality as well as the delivery.Depending on whether the business is upstream or downstream, the closeness to the consumers can be defined as well as the advantages.
A good example of vertical integration is the one where dell computers, which were considered as the most successful company in the 90s, used vertical integration of the supply chain to come up with the tightly coordinated supply chain as well as vertical integration.
Economies of scale refer to the factors in market which cause the value of the cost of production reduces as the volume of the outputs increases. There are mainly two different types of economies of scale. Internal economies are cost savings in a company, which are regardless of the industries as well as the environment. External economies are those cost savings which a firm gets due to how the industry it's based in is organized.
Economies of scale is an imperative element in a company as it determines whether large production is necessary to cut the losses in the company. A typical example is where a company spends $3000 in order to reduce 100 copies of a newspaper but takes $4000 to produce 1000 copies. The average cost of production falls from $30 to $4 since the aspect of cost of production is unrelated to magazines production.
Bibliography
Wilson, Robert D. 1971. Economies of scale. London: Audio Learning Ltd.
Reddy, Ram, and Sabine Reddy. 2001. Supply chains to virtual integration. New York: McGraw-Hill.
