Vertical integration of the software market. The concept of vertical integration. Motives of vertical integration

Vertical integration occurs primarily where there is a technological interdependence between consistently occurring manufacturing processes. It is a cooperation between several companies owned by companies or divisions (branches) of the Corporation, thereby providing sufficient flexibility in solving technological and managerial tasks. It should be distinguished by vertical integration that unites several independent businesses from a consistent production cycle in one company.

A sufficiently large number of works are devoted to the issue of vertical integration. This is explained by the greatest value that she plays in the lives of many companies.

The choice of the scheme for the implementation of vertical integration in the form of subsidiaries or branches depends, above all, from the laws of laws adopted by business practice and is determined within the framework of the corporate strategy.

Vertical integration plays an important role in oil and gas business. It represents a combination of various production processes within one company or group of companies that can be carried out in several geographic areas: from the exploration of oil and gas fields to the extraction of hydrocarbons, their further processing and implementation of the final consumer ("from a well to benzokolontics"). Manufacturing processes such as well drilling and repairing them,

transportation of hydrocarbons and others, many companies are included in Upstream or Downstream. Companies performing similar works are called service companies. They allow you to achieve a more efficient fulfillment of current functions in the main business of the oil company. Vertical integration allows companies to reduce business risks by increasing their market and economic costs.

Classification of vertical integration:

Full integration, while the company carries out the entire cycle of production and technological process, there is a single chain of value;

Incomplete or partial integration, while some products are made by the company independently, and the other part is purchased on the market;

Quasiitegration arises due to interaction with other companies (through the creation of alliances, associations) without expenditures (with the exception of organizational), but also without the transfer of property rights.

The classification of vertical integration is shown in Figure 2.1.

By the nature of the integration and position of companies in the technological chain or value chain, vertical integration can be divided into direct and reverse integration.

Companies can integrate "back" to suppliers of raw materials and semi-finished products - upward integration, - providing guaranteed supplies to perform its production process. Another goal of such integration can be the desire to access the new technology, critical for the main business.

Companies that integrate "forward" unite their efforts with manufacturers of semi-finished products, final products, retail networks, depending on the location of the integrated company in the operating chain - downward integration. This type of integration allows you to get more information about your consumers and monitor the state of affairs in the subsequent links of the production chain.

In the oil and gas business, Upstream includes exploration and mining of hydrocarbons, to downstream - processing and marketing (implementation).

* Everything without exception, oil companies in Russia are created on the basis of state privatized enterprises. Only subsidiaries created by the oil group can be attributed to the category of new JSC.

Figure 2.1- Classification of vertically integrated oil companies

The effectiveness of vertical integration is especially high when creating a complete production cycle with sales and maintenance of finite consumers of products, excluding the appearance of resellers.

One of the main goals of vertical integration is to reduce the costs due to the replacement of the market exchange of the internal organization. This is achieved by a reduction in transaction costs in the semi-finished markets, when organizing sales of finished products, that is, with the help of internalization, which is a replacement for market exchange for an internal organization. In this case, individual businesses can be included in the Corporation on the Division Rights. However, starting from a certain amount of the corporation, the cost of administrative and organizational costs may exceed savings from internationalization, therefore market exchange becomes more attractive.

In cases where businesses are represented by subsidiaries or even groups of companies, it is possible to use the transfer price mechanism to reduce taxes from turnover and VAT, thereby increasing the cost of companies.

With the help of vertical integration, it is possible to achieve reduction of emerging risks:

Integration "Back" guarantees the provision of raw materials at the time of its deficit and protection against price dictate on the part of independent suppliers;

The integration of "forward" allows you to influence the markets, ensuring the sale of your products and protection against the dictate of prices from the reseller.

In the process of preparing a vertically integrated holding company of a single strategy of a group of companies, the possibility of a better understanding of what happens in each of the business and changes, coordinate and coordinate the actions of each company individually and the whole group as a whole. The presence of its own internal production and consumption, partially covering needs or selling, allows you to achieve the best conditions on the part of independent suppliers or consumers, increasing profits and keeping flexibility.

The intensity of vertical integration depends on both the industry and from those capabilities that the company has.

A vertically integrated oil concern is a group of companies owned by Holding and united in several businesses: exploration and production of oil, its processing, petrochemistry and chemistry, refueling networks, as well as service companies that may also be highlighted in independent businesses.

Vertical integration allows the company to reduce capital and operating costs by reducing the amount of taxes paid, the cost of the cost of the risk reduction account, saving time spent on the preparation of contracts, ensuring price and supply stability. The last condition can be performed using such measures as a refusal to conservation of wells, even with the existence of low oil prices, as well as using maximum well boot and reduce downtime.

The disadvantages of vertical integration are manifested with the unsuccessful market conditions when companies need to cover constant costs of unprofitable businesses. In addition, low-loaded or incidental business reducing the market value of a vertically integrated company.

Measurement of vertical integration. Vertical integration in the oil business has existed more than 100 years, and today almost all oil and gas companies are vertically integrated. Leading oil companies are owners of significant oil reserves, oil refineries, oil pipelines and refueling networks.

The degree of integration of the oil industry is the highest of all industries, according to, this indicator is 0.67, for comparison, in mechanical engineering - 0.305, the food industry - 0.303.

However, in the oil industry there are still unintegrated or, differently, independent companies that cannot or do not want to integrate for various reasons. Despite the fact that their number is reduced, they occupy a certain niche. Independent companies can survive on the market by reducing the rate of profit, specialization, denial of large business size, using the scale of the scale, but the flexibility and efficiency of working with buyers, or, occupying niches that are not interested in large companies due to such reasons How: Geographical Features, Small Profitability or Market Size.

Deciding on the degree of vertical integration of the company or group of companies depends on the acquired benefits and prices that you need to pay for them. In this case, there is a need to choose that it is better: the creation of a small vertically integrated company or a fairly large specialized company, for example, oil-producing? Increase capital by attracting new shareholders or joining a large vertically integrated holding?

When making a decision, it is necessary to take into account not only the emerging direct economic effects, but also the effects created by the Unified Corporate Strategy and more efficient operational management of companies.

The benefits obtained from vertical integration should exceed the cost of its implementation, taking into account possible changes in the business environment, the time value of money and possible risks. When determining the degree of vertical integration, the condition of maintaining the financial stability of the company should be taken into account. Overly acquired capacities can create a negative effect in case of changing market conditions, emergence of unforeseen situations (accidents, hostilities in the area, etc.) or errors that can be made by managers in managing the company or individual businesses.

With the deterioration of the market situation, the situation may be a situation where the company's sales decreases, which will entail the growth of permanent costs. Therefore, there is a need to take into account possible changes in the environment and select the company's structure parameters in such a way as not to "unbalance" it in such situations. The restrictions on the degree of integration "from above" are high risks and the fall in profitability due to the negative effect of the scale.

To evaluate the degree of integration between oil and oil and oil refining, the self-sufficiency factor (Refining Self Sufficiency Ratio) is proposed, which is divided into internal (Domestic Sufficiency Ratio) and Global (CSNSMM) (World Wide Self Sufficiency Ratio):

KSN internal \u003d VDN / VPN; (2.1)

XN sums \u003d (VDN + NNNN) / (VPN + GNPN). (2.2)

where VDN is the internal oil mining;

NNNN - external oil production;

VPN - internal refining of oil at refinery;

GNPN - external refining of oil at refinery.

The degree of vertical integration is measured using a vertical integration indicator, which represents the ratio of the annual volume of the produced liquid hydrocarbons to the annual volume of recycled, which actually coincides with the self-sufficiency coefficient.

Indicators of the vertical integration of some oil companies for the period 2003-2005. Based on the study presents in Table 2.1.

Table 2.1 - Changing the average value of the vertical integration of oil companies for the period 2003-2005.

Given the time since the study, it is clear that too high integration is negatively affected by the viability of companies - much more than insufficient.

Thus, it can be said that the optimal indicator of vertical integration is 0.5-0.6.

Confirmation of the tendency to reduce the number of independent manufacturers with simultaneous leveling of their degree of integration is the example of Philips Petroleum, which in February 2001 made a absorption for USD7 billion. The independent refinery "Tosco", which, according to the Chairman of the Board of Philips Retroleuim, J. Malwa became the "final stage in the 18-month Odysseas for the transformation of Philips Retroleuim in one of the largest integrated companies." As a result, the ratio between the extraction and processing of the company was 60:40. However, after a slight period of time, a new association occurred - "Sonocophilips" was formed, which made a new company in the world in the world in terms of reserves and oil production. In October 2003, the Company's leadership in order to further restructure assets it was decided to sell the chain of automotive gas stations and shops with them, leaving owned only in the Central and Western states of the United States.

Another example is the absorption of "British Petroleum" companies "Arco" and "Amoko", as well as the "Exxon" and Mobil association (2000).

Leading Russian Winkles against the background of world oil companies have quite low integration rates, this is largely due to a relatively short period of their formation in the conditions of the domestic market. However, despite this, Lukoil OJSC, Rosneft OJSC and other major Russian companies increase their potential, increase the performance of vertical integration, trying to bring them to optimal values.

John Stuckey (John Stuckey) Director McKinsey, Sydney
David White (David White) Former employee McKinsey
McKinsey Bulletin Magazine № 3 (8) for 2004

Heads of any large company sooner or later have to solve vertical integration issues. The authors of this article, which, although it became a classic in a decade since its first publication, did not lose their relevance, consider the four most common foundations for vertical integration in detail. But the main thing, they call on the company's managers do not strive for vertical integration, if you can otherwise create or save the cost. Vertical integration is only successful in one case - if it is vital.

Vertical integration - a risky strategy, complicated, dear and practically irreversible. It is small and a list of successful cases of vertical integration. Nevertheless, some companies are taken to implement it, even without even conducting proper analysis of risks. The purpose of this article is to help managers to accept competent integration solutions. In it we consider different situations: one companies really need vertical integration, it is better to apply alternative, quasi-integration strategies. In conclusion, we describe the model that it is advisable to use when making such solutions.

When it is necessary to integrate

Vertical integration is a way to coordinate different components of the sectoral chain in conditions at which bilateral trade is not profitable. Take, for example, the production of liquid cast iron and steel - two stages of traditional steel production. The liquid cast iron is produced in blast furnaces, poured into thermally insulated buckets and in liquid form are transported to nearby, usually at a distance of a half-kilometer, the steel mill, where they are bottled according to steel-smelting units. These processes almost always performs one company, although sometimes liquid metal is sold and buying. So, in 1991, WEIRTON STEEL company sold the liquid cast iron of Wheeling Pittsburgh, located almost 15 km away.

But such cases are rare. Specificity of fixed assets and high frequency of transactions forcing technologically closely related pairs of buyers and sellers to discuss the conditions of continuous flow of transactions. Against this background, the transaction costs and the risk of abuse of market authorities are growing. Therefore, from the point of view of efficiency, reduce costs and risks, it is better that all processes perform one owner.

Scheme 1 shows the costs of costs, risks and coordination problems that need to be taken into account when making decisions on integration. The complexity is that these criteria often contradict each other. For example, vertical integration Although usually reduces some risks and transaction costs, but at the same time requires major starting investments, and, in addition, the effectiveness of its coordination is often very dubious.

There are four reasonable reasons for vertical integration:

• too risky and unreliable market ("failure" or "failure" of the vertical market);
• in companies operating in adjacent parts of the production chain, more market power than you;
• integration will give a company market power, since the company will be able to establish high input barriers to the industry and carry out price discrimination in different segments of the market;
• the market has not yet finally formed, and the company needs to be vertically "integrated forward" for its development, or the market is in decline, and independent players leave related production links.

Between these causes it is impossible to put a sign of equality. The first background, the failure of the vertical market, is the most important.

Insolvency of the vertical market

The vertical market is considered insolvent when making transactions on it too risky, and to compile contracts that could insure these risks, and control their execution is too expensive or impossible. The insolvent vertical market has three characteristic features:

• limited number of sellers and buyers;
• high specificity, durability and capital-capacity assets;
• high frequency of transactions.

In addition, uncertainty, limited rationality and opportunism, limited rationality and opportunism, are particularly pronounced in the insolvent vertical market, that is, the impact on any market. None of these characteristics in itself testifies to the insolvency of the vertical market, but in the aggregate they almost certainly warn about such a danger.

Sellers and buyers. The number of sellers and buyers in the market is the most important, although the most non-permanent variable that signals the insolvency of the vertical market. Problems appear when there is only one buyer and one seller (bilateral monopoly) or a limited number of sellers and buyers (bilateral oligopoly) on the market. Scheme 2 shows the structure of such markets.

Specialists in the field of microeconomics believe that in such markets, the rational forces of supply and proposals themselves do not install prices and do not determine the volume of transactions. Rather, the conditions of transactions, especially the price depend on the ratio of the forces of sellers and buyers in the market, and this ratio is unpredictable and unstable.

If there is only one buyer on the market and one supplier (especially with long-term relationships providing frequent transactions), both have a monopoly position. Since the conditions on the market change in an unpredictable manner, there are often disagreements between players and both may abuse their monopolized position, which creates additional risks and costs.

For bilateral oligopoly, the problem of coordination is particularly relevant. When on the market, for example, there are three suppliers and three consumers, then each player sees five others in front of him, with whom he will have to divide the overall surplus. If market participants act in imprudently, then in the struggle with each other will be transmitted to consumers. It would be possible to avoid such a development of events by creating a monopoly in each branch of the industry chain, but this does not allow anti-monopoly legislation. Another option remains - integrated vertically. Then, instead of six players in the market, there are three, everyone will compete only with two applicants for their share of surplus and probably behave more reasonably.

We took advantage of this concept when one company turned to us for help: she could not solve it, whether to maintain a repair shop for the needs of steel-smelting production. Analysis showed that the company would cost the services of external contractors much cheaper. However, the opinions of the company's leaders were divided: Some wanted to close the workshop, others were against, fearing the failures in production and dependence on small external contractors (within a radius of 100 km, only one enterprise operated, which repaired a large technique).

We recommended to close the repair shop, if it does not solve competition in the performance of planned-preventive repair and work that do not require complex machine processing. The volume of these works was known in advance, they were performed on standard equipment, and several external contractors would easily deal with them. The risk was small as the level of transaction costs. At the same time, we advised to leave the factory for repairing large parts at the factory (but significantly reduce it) so that it performs only emergency work, for which very large turning and turning and carousel machines are needed. It is difficult to predict the need for such a repair, only one external contractor could do it, and costs from equipment downtime would be huge.

Assets. If the problems of this kind occur only with a bilateral monopoly or bilateral oligopoly, do we not say then about a certain market curiosity that does not have a practical significance? Not. Many vertical markets, which seem to have many players on each side, actually consist of closely intertwined groups of bilateral oligopolists. These groups are formed because the specificity, durability and capital intensity of assets increase the costs of switching on other counterparties, which from the visible set of buyers only a small part has a real output on sellers, and vice versa.

There are three main types of assets specificity, which determine the division of industries on bilateral monopolies and oligopolies.

• Specificity of location. Sellers and buyers place major funds, such as a coal mine and a power plant, close to each other, thus reducing transportation costs and storage costs of warehouse stocks.
• Technical specificity. One or both sides invest in equipment that can be used only by one or both parties and is not a great value for any other use.
• Specificity of human capital. Knowledge and skills of employees of the company are valuable only for individual buyers or customers.

The specificity of assets is high, for example, in a vertically integrated aluminum industry. Production consists of two main stages: mining bauxite and alumina production. Rudniks and processing plants are usually close to each other (location specificity) for several reasons. First, the cost of transporting bauxites is incomparable above the cost of the boxites themselves, secondly, when enriching the amount of ore is reduced by 60-70%, thirdly, the processing plants are adapted to the processing of raw materials of a certain field with its unique chemical and physical properties. Finally, fourthly, the change of suppliers or consumers is either impossible or is associated with prohibitively high costs (technical specificity). That is why two stages - the extraction of ore and the production of alumina - are interrelated.

Such bilateral monopolies exist, despite the obvious many sellers and buyers. In fact, there is still no two-sided monopoly on the pre-investment phase of the interaction of mining and processing enterprises. Many mining companies and alumina manufacturers are cooperated worldwide and participate in tenders every time the development of the next new field is proposed. However, at the post-test stage, the market quickly turns into a bilateral monopoly. The minider and the ore enrichment, developing the field, are economically tied to each other specificity of assets.

Since sectoral players know well about the danger of the failure of the vertical market, the extraction of ore and the production of alumina is usually dealing with one company. Almost 90% of transactions with bauxes are produced in a vertically integrated medium or quasi-fracture structures, such as joint ventures.

Motor assemblies and component suppliers can also fall into a tough dependence on each other, especially when any components are suitable for one brand and model. With a high volume of investment in the development of a component (capital intensity), a combination of an independent supplier - an independent car assembly enterprise is very risky: the likelihood that one of the parties will take advantage of the case and revise the terms of the contract, especially if the model had a great success or, on the contrary, failed. Motable companies in order to avoid dangers associated with bilateral monopolies and oligopoly, "integration back" or, following the example of Japanese automakers, to create very close contractual relations with carefully selected suppliers. In the latter case, the reliability of relations and agreements protects partners from the abuse of the market situation, which often happens when technologically dependent companies are kept at a distance.

Bilateral monopolies and oligopoly arising in post-test stages due to the specificity of assets is the most common cause of the vertical market. The effect of assets specificity is repeatedly enhanced when capital-intensive assets are calculated for a long service life, as well as when there is a high level of constant costs due to them. With bilateral oligopoly, the risk of violation of the supply or sales schedule is generally large, and the high capital intensity of assets and large constant costs particularly increase damages caused by the disruption of production graphs: the scale of direct losses and lost profits during downtime. In addition, due to the long life of the assets, the period of time increases during which these risks may appear and costs.

Communted together, specificity, capital intensity and long-term operation often become the cause of high transition costs both for suppliers and consumers. In many industries, it is precisely the most solutions in favor of vertical integration.

Transaction frequency. Another factor of the vertical market is frequent transactions in bilateral oligopolies and high assets specificity. Frequent transactions, negotiations and trading increase costs for the simple reason that create more opportunities for the abuse of market authorities.

Scheme 3 reflects relevant vertical integration mechanisms depending on the frequency of transactions and characteristics of assets. If sellers and buyers interact rarely, then regardless of the degree of assets specificity, it is usually no need for vertical integration. If the specificity of the assets are small, the markets work efficiently using standard contracts, let's say leasing or commodity credit agreements. With high specificity of assets, contracts are quite complicated, but there are no need for integration. An example is large state orders in construction.

Even if the frequency of transactions is large, the low specificity of assets mitigates its negative effects: for example, a hike to a food store does not imply a complex negotiation process. But when assets are specific, long-term and capital-intensives, and transactions are often concluded, vertical integration is most likely justified. Otherwise, transaction costs and risks will be too high, and the compilation of detailed, excluding the uncertainty of contracts - the case is extremely difficult.

Uncertainty, limited rationality and opportunism. Three additional factors have an important, although not always an explicit influence on vertical strategies.

Uncertainty does not allow companies to compile contracts that could be guided in the event of a change in circumstances. The uncertainty in the work mentioned above the repair shop is due to the fact that it is impossible to predict when and what the breakdowns happen, how difficult will the repair work, what will be the ratio of supply and demand in the local markets for repairing equipment. In terms of high uncertainty, the company is better to leave the repair service: the presence of this technological chain link increases stability, reduces risk and costs for repair.

Limited rationality also does not allow companies to draw up contracts in which details would be described in detail the details of transactions in all possible options for developing events. According to this concept, formulated by the Economist Herbert Simon, the ability of people to solve complex problems is limited. The role of limited rationality in the market failure was described by Oliver Williamson, one of the students of Simon.

Williamson also introduced such a concept as opportunism to economic turnover: if possible, people often violate the terms of commercial agreements in their favor, if it corresponds to their long-term interests. Uncertainty and opportunism often turn out to be a driving force in the vertical integration of R & D services and markets of new products and processes obtained by R & D. These markets often become untenable because the main product R & D is information about new products and processes. In the world of uncertainty, the value of the new product is unknown to the buyer until he tries to "on the tooth." But the seller reluctantly discloses information until the payment of the goods or service is not to issue a "firm secret". Ideal conditions for opportunism.

If specific assets are needed for the development and implementation of new ideas, or if the developer cannot protect its copyrights, patented the invention, the company is likely to benefit from vertical integration. For buyers, this will be the creation of its own R & D units. For sellers - "Integration forward".

For example, EMI, the developer of the first computer tomograph, would have to "integrate forward" into distribution and service, as they usually make other manufacturers of high-tech medical equipment. But at that time she did not have the corresponding assets, and to create them from scratch, it was necessary to have a lot of time and money. GENERAL ELECTRIC AND SIEMENS with its integrated R & D structures, technological engineering and marketing has made a constructive analysis of tomograph, developed their, more advanced models, provided training, technical support and customer service and captured leading positions in the market.

Although uncertainty, limited rationality and opportunism are ubiquitous, they are not always equally pronounced. This explains some interesting features of vertical integration by countries, branches and periods of time. For example, Japanese steel and automotive companies are less "integrated back" - in industry suppliers (knots and components, engineering and technological services) than their Western colleagues. But they work with a limited circle of contractors with whom they support strong partnerships. In addition to all other things, Japanese manufacturers are ready to trust external counterparties also because for Japanese culture opportunism - the phenomenon is much less characteristic than for Western.

Protecting against market power

The failure of the vertical market is the most important argument in favor of vertical integration. But sometimes companies are integrated because there are more profitable market positions. If in one of the links of the industry chain more market power and therefore abnormally high profits, players from a weak level will strive to penetrate into a strong one. In other words, this link is attractive in itself and may be interested in players from both the industry chain and outside.

The industrial production of concrete in Australia is known for tough competition, since the input barriers to the market are low, and the demand for products, homogeneous and typical, cyclic. Market participants often lead price warfares, and they have low incomes.

Mining sand and gravel for concrete producers, on the contrary, extremely profitable business. The number of quarries in each region is limited, and the high costs for transporting sand and gravel from other regions put high barriers to enter this market of new players. Little players, protecting common interests, set prices much higher than those who would have developed in a competitive market environment, and receive significant superflores. The essential share of costs in the production of concrete falls on expensive raw materials, therefore companies - concrete producers "integrated back" into the career business, mainly due to the acquisitions, and now three large players control almost 75% of industrial production of concrete and career developments.

It is important to remember that the access to the market through the absorption does not always bring the desired fruits to the absorption side, because it can give capitalized equivalent to the excess in the form of an overestimated price for the absorbed company. Often players from the less influential links of the sectoral chain pay too high the price for the company from stronger links. In the Australian industry of industrial production of concrete as a result of at least several quarry absorption costs for buyers' companies was destroyed. Recently, one of the major producers of concrete absorbed smaller in the size of the integrated gravel and concrete producer, paying so much that the price value and cash flow rate of the company amounted to 20: 1. At the cost of capital of the absorbing company about 10%, it is very difficult to find an excuse of such a high overpare.

The players from less influential links of the sectoral chain certainly have incentives to promote more influential, but the question is whether they can integrate so that the cost-related costs have not exceeded the expected benefits. Unfortunately, judging by our experience, it will be rare.

The leaders of such companies often mistakenly believe that both industry insiders make it easier for them to enter other links of the sectoral chain than applicants from the part. However, usually technologically different links of the sectoral chain differ so much among themselves, that from the "strangers" from other industries, even if they have the same knowledge and skills, it happens much more chances to reach a new market. (New players, by the way, can also destroy the potential of the industry link: once the barriers to the entrance overcomes one company, it may turn out from others.)

Creation and use of market power

Vertical integration may be reasonable in a strategic plan if its goal is to create or use market power.

Entrance barriers. When most competitors in the industry are vertically integrated, unintegrated players, as a rule, it is difficult to enter the market. To become competitive, they often have to provide their presence in all units of the industry chain. The capital costs and the economically reasonable minimum level of production are growing, which actually increases the input barriers.

The aluminum industry is one of the industries in which the vertical integration contributed to an increase in the input barriers. Until the 1970s, six large vertically integrated companies - Alcoa, Alcan, Pechiney, Reynolds, Kaiser and Alusuisse - dominated all three links: in bouxite mining, alumina production and metal smelting. Markets of intermediate raw materials, bauxite and alumina were too small for non-integrated traders. But even integrated companies did not burn with desire to lay out $ 2 billion (in 1988 prices) necessary for a reasoned market scale as an integrated player.

Even if the beginner overcame this barrier, he would have to immediately find ready-made markets for the sale of its products - about 4% of the global volume of aluminum production, which would increase production. The difficult task in the industry is growing at a speed of about 5% per year. It is not surprising that high input barriers in the industry appeared mainly due to the strategy of vertical integration, which large companies follow.

Approximately the same entrance barriers exist in the automotive industry. Automakers are usually "integrated forward" - they have their own distribution and dealer (on franchise-based) network. Companies with a powerful dealer network usually own it entirely and completely. For newcomers of the market, this means that they must invest more means and time in the development of new extensive dealer networks. If it were not for durable, the dealer networks of American companies, the Japanese producers at one time would have taken away a much greater market share in American auto gygigants like General Motors.

Nevertheless, create vertically integrated structures to build entrance barriers, often very expensive pleasure. Moreover, the success at the same time is not guaranteed, and if the volume of super profits is quite large, then the inventive beginners will eventually find loopholes in the erected fortifications. Aluminum producers, for example, at some point lost control over the industry, mainly because the company-strangers penetrated them through joint ventures.

Price discrimination. Thanks to the "integration forward" into certain consumer segments, the company can extract additional benefits from pricing discrimination. Take, for example, which uses the supplier's market authority, whose consumers occupy two segments with different degrees of sensitivity to price changes. The supplier would like to maximize its profits by setting a higher price in the consumer segment with low sensitivity and lower in a segment with high sensitivity. But he cannot do this, because consumers receiving goods at a low price will resell it at a higher consumer from the neighboring segment and ultimately undermine this strategy. "Integrating forward" into low-season consumer segments, the supplier will be able to prevent the resale of its products. It is known that aluminum producers are integrated into the most sensitive to the price changes in the production sector (production of aluminum cans, cable, casting components for car consumers), but do not seek in sectors in which there is almost no danger of substitution of raw materials and suppliers.

Types of strategy at different stages of the industry life cycle

When the industry is only born, companies are often "integrated forward" to develop the market. (This is a special case of the failure of the vertical market.) In the first decades of the existence of the aluminum industry, the manufacturers were integrated into the production of aluminum products and even consumer goods to "push" aluminum to markets, which traditionally used steel and copper. The first fiberglass and plastic manufacturers have also found that the advantages of their products compared with traditional materials were appreciated only due to the "integration forward".

However, in our opinion, one of this justification for vertical integration is not enough. Integration will be successful only if the acquired company owns unique patented technology or a well-known brand that it is difficult to copy to competitors. It makes no sense to acquire a new business if the buyer will not be able to receive super-profile at least a few years. In addition, new markets will be successfully developed only if the new product has obvious advantages compared to existing or similar products that may appear in the near future.

When the industry reaches the aging stage, some companies are integrated to fill the emptiness formed after the care of independent players. As the industry agrees, weak independent players leave the market, and the position of key players turns out to be vulnerable in the face more and more concentrating suppliers or consumers.

For example, after in the mid-1960s, a cigar business decline began in the United States, leading in the country Supplier - Culbro Corporation had to acquire all distribution networks in the key markets of the east coast of the United States. Its main competitor, Consolidated Cigar, has already been sold, and Culbro's distributors "have lost interest" to cigars and with a greater hunt began to trade other goods.

When vertical integration is not needed

Vertical integration must be dictated only to a vital necessity. This strategy is too expensive, risky, and it is very difficult for her "give reverse". Sometimes vertical integration is necessary, but very often companies go to excessive integration. This is due to these two reasons: first, integration solutions are often accepted on the basis of dubious grounds, and secondly, managers forget about the large number of other quasi-integration strategies that can be very preferable to complete integration in terms of costs and economic benefits.

Dubious foundations

Often, the decisions about the vertical integration are not substantiated. Cases when the desire to reduce cyclicity, ensure the market entry, break into segments with a greater value added or to get closer to the consumer could justify such a step, extremely rare.

Reducing cyclicity or variability of income. This common, but often not enough good reason for vertical integration - variation on the old topic is that the diversification of the corporate portfolio is beneficial to shareholders. This argument is illegal for two reasons.

First, revenues in the adjacent links of the sectoral chain are positively correlated and affected by the same factors, such as changing demand for the final product. So, the combination of them in one portfolio will noticeably not affect the overall level of risk. For example, this is the case in the production of zinc ore and zinc smelting.

Secondly, even with a negative correlation of income, smoothing the cyclicity of corporate profits is not so important for shareholders - they can diversify their own investment portfolios to reduce undertaken risks. Vertical integration in this case is beneficial to the management of the company, but not to shareholders.

Guarantees of supply and sales. It is believed that if the company has its own sources of supply and sales channels, it is significantly reduced the likelihood that it will be supplied from the market that it will fall as a victim of price conspiracy or will suffer from short-term imbalance of supply and demand that occurs sometimes at intermediate commodity markets.

Vertical integration can be justified when the threat of displacement from the market or "unfair" pricing indicate either the failure of the vertical market, or on the structural market power of suppliers or consumers. But where the market operates regularly, there is no need to own supply sources or sales channels. Market players will always be able to sell or buy any number of goods at a market price, even if it seems "unfair" in comparison with costs. An integrated company operating in this market only deceives itself by establishing internal transfer prices, different from market. Moreover, the company integrated on this basis can make incorrect decisions regarding the level of production and capacity utilization.

The structural features of the selling and buying parties to the market are the most implicit, but critical factors that determine when the supply and sales need to be taken. If the principles of competition are characteristic of both sides, the integration will not benefit. But if structural features generate the failures of the vertical market or constant imbalance of market positions, integration may be reasonable.

Several times we witnessed an interesting situation: a group of oligopolists - suppliers of raw materials for a rather fragmented industry with a weak buyer's power - "integrated forward" to avoid price competition. Oligopolists understand that the market share, leading price wars, is short-sighted, except, perhaps, very short periods, but still can not resist the temptation to increase their market share. Therefore, they are "integrated forward" and thereby enshrine all major consumers of their products.

Such actions are reasonable when players avoid price competition and when the price that the company-oligopolists pay for the absorption of their industrial consumers does not exceed their pure present value. And "integration forward" is beneficial only if it helps to keep the oligopol profit in the upper links of the sectoral chain, where there is a permanent imbalance of forces.

Providing additional cost. The opinion that the company should strive to the links of the sectoral chain with greater value added, usually express those who adhere to another fairly outdated stereotype: you need to be closer to the consumer. Following these advice leads to a higher "integration forward" - in the direction of the end user.

Perhaps a positive correlation between the profitability of the branch chain link, on the one hand, and the absolute value of its value added and proximity to the consumer - on the other, and exists, but we believe that this correlation is weak and unstable. Vertical integration strategies based on these prerequisites usually destroy the share value.

Surplus, not value added or proximity to the consumer - this is what brings really high profits. Surplus is the income received by the company after covering all costs of doing business. Size Surplus and value added (which is defined as the sum of all costs and premises minus the cost of all materials and / or components purchased in the adjacent link of the sectoral chain) of one of the links of the sectoral chain may be proportional only as a result of a random coincidence. However, the surplus is most often formed on the stages closest to the consumer, because it is there, according to economists, there are direct access to the consumer wallet and, accordingly, excess consumers.

Therefore, the general recommendation should be like this: "Integrate into those links of the sectoral chain, where you can get the maximum surplus, regardless of the proximity to the consumer or the absolute value of the value added." Nevertheless, remember that the links with a consistently high breath need to be protected by entrance barriers, and the costs of overcoming these barriers with a new player entering the sector by vertical integration should not exceed the surplus that it can get. Usually, one of the entrance barriers becomes special knowledge necessary for the conduct of a new business, and they often do not have newbies, despite the experience gained in related units of the sectoral chain.

Consider, for example, the sectoral chain of the cement and concrete industry in Australia (see scheme 4). In each individual, the surplus is not proportional to the value added. In fact, the link with the highest value added, that is, transportation does not bring decent returns, while the sector with the lowest value added - the production of hydroclacova dust creates significant surplus. In addition, the surplus is not concentrated in the sector nearest to the consumer, and if it is formed, then at the primary stages. The size of the surplus on different links of the sectoral chain varies significantly, and it needs to be determined in each case.

Quasi-integration strategies

The management of companies sometimes goes to excessive integration, losing sight of many alternative quasi-integration solutions. Long-term contracts, joint ventures, strategic alliances, licenses for the right to use technologies, ownership of assets and franchising require smaller investments and at the same time leave companies more freedom than vertical integration. In addition, these strategies reliably protect from the failure of the vertical market and from suppliers or consumers with greater market power.

Joint enterprises and strategic alliances, for example, allow companies to exchange certain types of goods, services or information and at the same time maintain formal business relations in all other positions, maintain their status of independent companies and not exposed to the risk of anti-monopoly persecution. Potential mutual benefit can be maximized, and the conflict of interest inherent in trading relationships is minimized.

That is why in the 1990s most factories in the aluminum industry turned into joint ventures. Through such structures, it is easier to exchange bauxites, alumina, know-how and knowledge of local specifics, to establish oligopolistic coordination and manage relations between global corporations and governments in which they work.

The ownership of assets is another type of quasi-integration structure. The owner reserves the ownership of key assets in adjacent links of the sectoral chain, but gives them to the management of external contractors. For example, car manufacturers or steam turbines own a specialized tool, snap, templates, forms for stamping and casting, without which it is impossible to produce key components. They conclude agreements with contractors for the production of these components, but remain owners of production tools and thus protect themselves from the possible opportunistic behavior of contractors.

Similar agreements can be concluded with companies from the lower links of the sectoral chain. Franchise agreements allow the enterprise to control the distribution, without distracting substantial financial and managerial resources, which would be inevitable with complete integration. The franchisor does not seek to own material assets, as they are not specific or long-term, but remains the owner of intangible assets, such as a trademark. Having the right to cancel the franchise agreement, the franchisor controls standards. For example, McDonald's Corporation in most countries in which it works hards hardly beyond the prices, product quality, level of service and purity.

If we are talking about buying or selling technology, then as an alternative to vertical integration, licensed agreements should be considered. Technology and R & D markets are at risk of failure, since inventors are difficult to protect their copyrights. Sometimes the invention has value only in conjunction with special additional (complimentary) assets, such as experienced marketing experts or customer support. The license agreement may be a good solution to the problem.

Scheme 5 presents a methodology for making decisions for the developer of new technology or products. We see, for example, that when the developer is protected from fakes with patents or commercial secrets, and additional assets either do not matter, or they can be found on the market, then it is necessary to conclude license agreements with all those who want and conduct long-term pricing policy.

This strategy is usually suitable for industries such as petrochemistry and cosmetics. When copying technology becomes easier, and the importance of complimentary assets is growing, vertical integration may be necessary, as we showed on the example of a computer tomograph.

Changing vertical strategies

With the change in the structure of the company's market must adjust their integration strategies. Among the structural factors, the number of sellers and buyers and the role of specialized assets are changed. Of course, companies should review strategies, even if they simply proved to be erroneous, and for this it is not necessary to wait for any structural changes.

Sellers and buyers

In the mid-1960s, the oil market demonstrated all the symptoms of vertical insolvency (see scheme 6). The four largest sellers controlled 59% of the industry sales, eight largest - 84%. Approximately there were cases from buyers. Possible combinations of adequate to each other buyers and sellers were quite small, since oil refineries could only work with certain varieties of oil. Assets were capital-intensive and long-term transactions - very frequent, and the need to constantly upgrade the plants increased the level of uncertainty. It is not surprising that the spice market of the oil almost did not exist, most transactions were made within the Company, and if contracts with external contractors were concluded, then for 10 years - to avoid transaction costs and risks associated with trade in the unstable, vertically insolvent market.

However, over the next 20 years, the market structure has undergone fundamental changes. As a result of the nationalization of oil reserves with members of OPEC (replaced "seven sisters", many national exporting companies) and increasing the number of exporters - not members of OPEC (such as Mexico) significantly decreased the concentration of sellers. By 1985, the market share controlled by the four largest vendors fell to 26%, and eight - up to 42%. The concentration of property on refineries has significantly decreased. Moreover, due to technological improvements, the specificity of assets decreased, since modern plants can process significantly more oil varieties and do it with less switching costs.

All this pushed the development of the effective market for crude oil and significantly reduced the need for vertical integration. According to approximate estimates, in the early 1990s, about 50% of transactions occurred on the spot market (where even large integrated players are traded), and the number of non-integrated players began to grow rapidly.

Disintegration

The shift in the direction of vertical disintegration, which took place in the 1990s, was caused by three main factors. First, in the past, many companies were integrated without sufficient reason and now, although there were no structural changes, they should have been disintegrated. Secondly, the emergence of a powerful merger and acquisitions market increases the pressure on excessively integrated companies and forces them to restructure - either voluntarily or to coordinate their shares. And thirdly, in many industries around the world, structural changes began, which strengthen the benefits of trade and reduce the risks associated with it. The first two reasons are obvious, and the third, in our opinion, requires explanation.

In many sectoral chains, due to the increase in the number of buyers and sellers, costs and risks associated with trade decreased. Deposits such as telecommunications and banking services were deregulated, which allows new players to enter the markets previously engaged in national monopolies or oligopolies. In addition, with the economic development of many countries, including South Korea, China, Malaysia, more and more potential suppliers appear in many industries, such as consumer electronics.

Also, the globalization of consumer markets and the need to become "local" in any of the countries of the presence forces many companies to create production facilities in the regions in which they used to export their products. This, of course, increases the number of buyers of components.

Another factor that reducing costs and increases the positive effects of trade is the growing need for greater production flexibility and specialization. The manufacturer of cars, for example, which uses thousands of components and nodes in its production (at the same time, they are constantly complicated, and their life cycle is shortened), it is very difficult to keep the leading position throughout the chain. It is much more profitable to focus on design and assembly, and accessories to purchase from specialized suppliers.

It is important that today's managers have been supported in the use of quasi-integration strategies, such as long-term privileged relationships with suppliers. In many industries, supply units are trying to establish closer connections with suppliers. In the automotive industry, the United States, for example, companies refuse rigid vertical integration, reduce the number of suppliers and develop stable partnerships with only multiple independent suppliers.

However, there is an opposite tendency to consolidation. While conglomerates are disaggred, their components are in the hands of companies that with their help increase their shares in certain markets. But, in our opinion, factors that stimulate the formation of sectoral structures that can compete at the global level is much stronger.

Not only industry chains are disintegrating: under the influence of the market, many companies are forced to disintegrate their own business structures. Cheaper foreign manufacturers make companies from developed countries constantly reduce costs. Technological advances in information and communication technologies reduce bilateral trade costs.

Although all these factors contribute to the disintegration of industry chains and business structures, it is still worth making one caution. We suspect that some executives seeking to get rid of "extra assets" and "give the company the best flexibility" may eventually throw out a child with water - and not even one. They disintegrate some functions and activities, vital in the conditions of an insolvent vertical market. As a result, it turns out that some strategic alliances for which they switched is legalized piracy, and some "partners" -posters do not mind to show their nestors, barely competitors will be expelled out of the door.

In any case, the solution for integration or disintegration should be based on a thorough analysis and not accepted at the fashion of the fashion or by the Nativity. Therefore, we have developed a step-by-step methodology of vertical restructuring (see diagram 7). The main idea is still the same: integrate only if it is vital.

Use of methodology

We successfully applied this methodology in situations where our clients had to decide whether to leave this or that production or to acquire the necessary products (services) on the side. Among such dilemmas can be called the following:

• do you need to leave the repair shop in the steel plant in the steel plant?
• does a large mining company need their own legal department or more profitable to use the services of a law firm?
• print Was the bank checkbooks on their own or order their specialized printing houses?
• do I need a telecommunications company with 90-thousand personnel to organize your own learning center or better attract instructors from?

We also used our methodology for analyzing strategic problems, such as:

• what parts of the business structure are divisions to develop new products, a branch network, a network of ATMs, a data center, etc. - should a retail bank own?
• what mechanisms to use the State Research Organization when it provides services and sells their knowledge to customers from the private sector?
• is it worth the mining and processing company to integrate into metal production?
• with which mechanisms of the agricultural company penetrate the Japanese market of imported meat?
• should a brewing company get rid of the network of beer restaurants belonging to it?
• should the mining gas company purchase pipelines and power plants?

Process

The process reflected in Scheme 8 says for itself, but several moments still should be explained.

First, taking a strategic decision, the company should seriously treat the quantitative assessment of various factors. As a rule, it is important to know exactly the cost of switching (in case the company has to change the supplier, by agreement with which it has invested in specific assets), as well as transaction costs, inevitable in the event of procurement or sales by third parties.

Secondly, in most cases, when analyzing the advantages or deficiencies of vertical integration, it is important to estimate the behavior of small groups of sellers and buyers. This technique, as an analysis of the demand and supply, helps to see the entire spectrum of possible actions, but it cannot be used for a deterministic projection of behavior (although it is quite suitable for analyzing more competitive market structures). To predict the actions of competitors and choose the optimal strategy, it is often necessary to apply dynamic modeling and competitive games. Similar methods for solving problems are science and art equally, and our experience shows that there is absolutely the participation of the highest leaders of the company so that they understand and recognize the assumptions about the behavior of competitors who often have to do.

Thirdly, this process involves greater analytical work, and it takes a lot of time. Primary, the most general analysis of the alleged steps reveals key problems, allows you to develop hypotheses and dial the material for subsequent deeper analysis.

Fourth, those who will use our methodology should be prepared for what will face a serious opposition. Vertical integration is one of those recent business strategy bastions, where intuition and traditions are revered above all. The universal solution to this problem is difficult to offer, try to give examples of other companies from your or similar industry, which will clearly illustrate your abstracts. Another way is to attack the erroneous logic "in the forehead", decompose it into composite parts and find weak links. But perhaps it is best to involve all interested parties in the analysis and decision-making process.

Vertical integration is a complex, capital-intensive strategy and long-term, and therefore conjugate with risk. And it is not surprising that sometimes the leaders are mistaken - and give far strategists the opportunity to learn from other errors.

See, for example: R.P. Rumelt. Structure and Economic Performance. Harvard University Press, 1974.

See: H.A. SIMON. Models of MAN: Social and Rational. NEW YORK, John Wiley, 1957, p. 198.

See: O.E. Williamson. Markets and Hierarchies: Analysis and AntiTrust implications. New York, FREE Press, 1975.

See: D.J. TEECE. Profiting From Technological Innovation // Research Policy, Vol. 15, 1986, p. 285-305.

The concepts of "super-profile" and "surplus seller" are synonymous.

See: E.R. Corey. The Development of Markets for New Materials. Cambrige, Ma, Harvard University Press, 1956.

See: K.R. Harrigan. Strategies for declining business. Lexington Books, 1980, Chapter 8.

In economic theory there is an integration concept. Integration is the process of developing sustainable interrelationships of neighboring states leading to their gradual economic merger, based on the agreed interstate economy and policies. Integrate horizontal and vertical integration.

Horizontal integration is accompanied by the acquisition by one firm of others engaged in the same business. A variety of horizontal integration is diversification, which means unification of firms whose technological processes are in no way connected (for example, the production of chemical fibers and aircraft).

Vertical integration is a method that the company creates (integrates) its own input or output steps of the technological chain. Integration can be complete (combining all inputs or outputs) or narrow (buying a company of only part of the incoming elements and the production of other on its own).

The company using vertical integration usually motivates its desire to strengthen the competitive position of its key source business, which should be promoted: cost savings; waste from market value in integrable industries; improving the quality control of industrial and management processes; Protection of own technology.

However, the vertical integration has both negative sides: increased costs; Inevitable financial losses with a quick change of technology and unpredictability of demand.

Vertical integration can increase costs if the company uses its own input in the presence of external cheap sources of supply. This can also occur due to the lack of competition within the company, which does not encourage its suppliers to reduce production costs. When changing the technology, the risk of excessive binding of the company to the outdated technology. With permanent demand, a higher degree of integration allows you to more reliably protect and coordinate production. When demand is unstable and unpredictable, such coordination during vertical integration is difficult, which increases the cost of management. Under these conditions, narrow integration may be less risky than complete, since it reduces costs compared to full and under certain conditions allows the company to expand vertical integration. Although narrow integration can reduce management costs, it cannot be completely eliminated, and it really limits the expansion of vertical integration limits.

All the above, the above and emphasizes the relevance of the selected course of the course work.

The purpose of this course work is to study vertical integration. The tasks of this work is to find the determination of vertical integration, the study of the causes of vertical integration, consideration of vertical restrictions and mergers, study of this topic at the present stage.

To produce any type of product, it is necessary to carry out a series of stages, each of which includes a sequence of technological converters. For example, it is necessary to develop raw materials, to extract raw materials, deliver it to the place of processing, recycle into intermediate, and then finite products, distribute them and deliver to the consumer.

Vertical integration is a combination of two or more such stages of production. Theoretically, it may include all stages - for example, from mining raw materials before the distribution of the final product between manufacturers. In this case, all the transformation of the product on each of the stages must be internal within the firm. In fig. 1 shows elements and vertical integration options. The sequence of technological operations T 1 - T q characterizes the completed production cycle, which includes the sequence of production steps E 1 - EM, the growth of the value added comes from the initial to the final operation, and it increases with the product output of the production process. If, on each of the stages, the product is made by the sole firm, then the vertical integration is absent, and each subsequent stage is implemented using a transaction on the open market.

In reality, almost every firm has several intermediate integration stages, i.e. Carries out some sequence of technological conversations, combining them with the purchase of source resources of other firms. In the product flow, they can integrate against the flow (lagging), or by the flow (advanced).

With the activities of non-integrated firms, products move from one stage to another with the help of market transactions on the basis of free market prices. In integrated firms, the internal transfer of products from the stage to the stage is carried out on the internal (conditional) gear prices that do not require equivalence market prices and fully depend on the internal interests and strategies of the company's behavior. In this regard, it is necessary to note the reasons for choosing the integration of the steps, since:

Market transactions can provide close, efficient and controlled contacts and strict property;

High-end control in integration can be effective, authorized and relatively inexpensive.

The question of the rotation of the vertical integration and its very feasibility is a comprehensive question of theory and practice, which still remains in many ways a discussion. In particular, the integration and monopoly forces remains the core of disputes.

Economists of the Chicago UCLA school tend to say that integration cannot transform monopolous forces from one level to another, cannot create large market forces than existing in horizontal levels. Other opinions are reduced to the fact that integration, on the contrary, generates a transaction, excludes the market and therefore can exclude the rivalry of sellers for access to resources. In this regard, it is important to note the actualization of the problem of the possibility of both the definition and measurement of the level (value) of integration, as well as the reasons for the use of this process by firms.

From the standpoint of measuring the level of vertical integration, the intuitive simplicity rests on the measurement method itself. You can calculate the number of steps in broad integration, but uncertainty arises in determining the concept of "stage" - it may include many individual relative to independent stages. For example, in the electronics industry, the preparation processes of integrated circuits include 2.5-3 thousand technological stages (transitions), which are sometimes sufficiently difficult to allocate into separate stages. Alternatively, an indicator of the added value of the company to its end-income from sales can be used as an index of the degree of integration of these firms. The integrated manufacturer adds cost due to many stages, so its indicator will be high. For example, an indicator of the added value of the retail merchant will be low. At the same time, there are examples and other polarities - the production of bricks is one-step and has high added value, and multidisciplinary industries have low value added. The value added rate may be less for industries that are ahead in the production chain (raw materials, processing).

Thus, so far there are no perfect (reliable) integration level meters, conceptual approaches require clarifications and improvements.

Efficiency includes the use of technical conditions and cost savings when dealing.

Some of the technical efficiency are physical - for example, in metallurgical production, thermal resources can be saved when smelting iron and the manufacture of duals and their processing with the preservation of the heated state. (Heat can be used to heal water, heat heating and utility farms, etc.).

Savings and achievement of effectiveness can also be obtained by increasing the level of the organization, more clear coordination and interpenetration of technological processes that exclude additional costs and risk, as well as observance of clear charts and regulatory procedures.

Vertical integration- Production and organizational association, merger, cooperation, interaction of enterprises related to the general participation in the production, sale, consumption of a single final product: suppliers of materials, manufacturers of nodes and parts, finite product collectors, sellers and consumers of the final product.

Vertical integration denotes that part of the value added, which is made in the framework of joint ownership. The price of the goods sold will surely include the costs of materials, components and systems. The high procurement price of these investments means a low level of integration. If the main share of the total value of sales is created within one organization, the level of integration will be high. The concept of horizontal integration in Pasha time is used much less and refers to the use of a wide range of products in order to maximize customer satisfaction.

Vertical integration is the process of replacing market transactions with intracorporate transactions, which leads to a planned economy in which suppliers enjoy a monopoly position, and consumers simply do not have another choice. Vertical integration, as well as diversification, was very popular in the management of commercial organizations, but the peak of this popularity passed several decades ago. As a classic example, you can bring Singer, an American company for the production of sewing machines, which at some point integrated all its operations from primary sources of raw materials (forests and iron mines) to ready-made sewing machines.

Vertical integration in the company is closely related to outsourcing and analysis "to produce or buy" and affects such philosophical questions as "Did Ronald Couze Nobel Prize in 1992?" Or "where does the company begins and ends and why?".

Experience shows that a low level of competition leads to a high level of integration, that is, diversification. Those countries of the world where competition was low, experienced a strong influence of the planned economy to be competitive in the modern world with its globalization. This led to a thorough revision of the entire business chain, as a result, considering the possibilities of outsourcing. As a result, traditional cost chains were broken and new companies were created. At the same time, the performance of old companies decreased. Production of components and supply of auxiliary systems in the telecommunications industry were given to PA spookice specialized companies, the main activity of which was the production of electronics.

Most sectors are now already in the phase of reducing integration, when they independently produce less finite products and buy more components from third-party suppliers.

Theoretically, all functions can be performed by individual companies. We can allocate a computer department, a factory, sales company and other parts of the managerial apparatus. The decision on vertical integration, in fact, implies the choice between to produce goods and / or provide services on their own, and to buy them from anyone else.

We gradually revealed disadvantages of advanced vertical integration. The high level of vertical integration became the problem and object of struggle for Mikhail Gorbachev in the Soviet Union. "Approximately the same problem arises from all traditional airlines. The largest European companies have always been relatively free from the voltage of the competitive struggle, and, accordingly, it has been characterized by a high level of vertical integration. In a competitive fight with newcomers, such as Ryanair or Easy.jet, old companies faced with difficulties associated not only with their cost structures, but also with advanced vertical integration. These companies themselves were engaged in the maintenance of engines, cleaned their aircraft, led their own terrestrial provision services and loading and unloading works, etc., which, of course, led to the conclusion of a number of intermediary transactions.

For centralized organizations, an excessive belief is characterized in its own abilities, which is expressed in the desire to do everything on their own. For organizations, more prone to entrepreneurship, on the contrary, is characterized by another trend: they make a more efficient chain by purchasing them the necessary goods and services from other companies. Below are negative features of advanced vertical integration:

• 1. It eliminates market forces, and together with them the ability to correct extra operations.
• 2. It makes attractive granting subsidies, which distorts the picture of the competition and distorts the meaning of the company's existence.
• 3. It creates a deceptive feeling of strength that does not correspond to the realities of the free market.
• 4. It creates interdependence that can lead to the collapse of any of the functions involved, if one of them turns out to be in a difficult situation.
• 5. It is organized by the closed market (guaranteed sales channels) lulls the company's vigilance and creates a false sense of security.
• 6. A false sense of security is dulling the desire and ability of the organization to participate in a competitive struggle.

The basis of many examples of vertical integration is erroneous representations and self-deception. The most common of delusions is faith in the possibility of excluding competition in a separate area of \u200b\u200bthe production chain using its control. Some of the illusions prevailing vertical integration in the world are listed below:

Illusion 1: A strong market position at one stage of production can be transformed into a strong position on another.

This assumption often led to incorrect investment solutions in the activities of the Cooperative of Swedish consumers * and other conglomerates, which were subsequently exposed to the above deficiencies.

Illusion 2: Commercial operations that do not exceed one firms exclude the participation of trade agents, simplify the management process and thus make transactions cheaper.

This is nothing more than the classic credo of all the adept plan for the planned economy, which consider centralized controls the only right way, and the free market is worthy of anathema.

Illusion 3: We can resurrect a strategically weak unit, bought out the unit following it in the production chain, or a unit, preceding it.

This is possible in rare cases. The logic of each industry should be assessed by its own indicators. This rule applies here with the exception of diversification situations in order to distribute risks.

Illusion 4: The knowledge of the industry can be used in order to achieve a competitive advantage at the stages of both previous and subsequent operations.

It is worth considering potential advantages in more detail and make sure that this logic does not enter a mislead.

There are many examples of a stunning increase in the level of profitability achieved by the destruction of vertically integrated structures. Perhaps it is for this reason that commercial organizations are generally moving towards a smaller level of integration. Manufacturers of cars with their own supply channels do not supply their cars to export markets at a less low price than those that enjoy the services of independent supplies companies. They also make their own gearboxes are not cheaper than enterprises specializing in the production of gearboxes.

One of the reasons why vertical integration was so popular in a technocratic era should be considered obvious savings on the scale, which was tangible and measured, in contrast to the benefits of small scale, such as the spirit of entrepreneurship and the energy of competition, which is impossible to express the numbers.

In certain specific situations, vertical integration has a positive side, especially when monitoring key resources allows to achieve competitive advantages.

Some are listed below:

• - higher level coordination of operations with better control capabilities
• - closer contact with end users thanks to vertical integration
• - Creating a stable relationship
• - Access to technical know-how, meaningful for this industry
• - Confidence in the supply of the necessary goods and services.

The integration of the tourist company Vingrevsor to the hotel business by creating country villages at the tourist resorts is an example of growth from the sale of vouchers before placing the post of vacation, a step that was regarded as a likely strategic advantage.

SAS also invested in the hotel, and Ike with its integration back from the sale of furniture to its development and production planning was balanced by integration forward leaving the latest production stage (furniture assembly) to consumers themselves.

The basis of vertical integration is often due to narrowing or excessive pride, so it is worth carefully considering its own internal motives.

Tired of the kitchen? Want to change something? Order kitchens to order According to individual orders.

This strategy means that the company is expanding in the areas of activity related to the promotion of goods to the market, its implementation to the final buyer (direct vertical integration) and related to the flow of raw materials or services (reverse).

Direct vertical integration protects buyers or distribution network and guarantees the purchase of products. Reverse vertical integration is aimed at consolidating suppliers supplying products at lower prices than competitors. Vertical integration also has a number of advantages and disadvantages, some of them are shown below.

Benefits:

There are new opportunities for savings that can be implemented. It includes the best coordination and management, reduction of costs for loading and unloading and transportation, the best use of areas, capacities, easier collection of information about the market, reducing negotiations with suppliers, less expenses for transactions and benefits from stable connections.

Vertical integration should guarantee the organization of delivery in a tighter time and, on the contrary, selling its products during periods of low demand.

It can provide the company more space for participation in differentiation strategies. This is because it controls most of the value chain, which can give more differentiation opportunities.

This path allows you to withstand the significant market power of suppliers and buyers.

Vertical integration can allow the company to increase the overall profit on investments, if the proposed option assumes the return greater than the alternative price of the company's capital.

Vertical integration may have technological advantages due to the fact that the acquirement organization will receive a better understanding of technology, which can be fundamental to the success of activities and competitive advantage.

Disadvantages:

In vertical integration, a tendency towards an increase in the proportion of constant costs is laid. This is due to the fact that the company should cover the constant costs associated with feedback or direct integration. The consequence of such an increased operational dependence is that the risk of an enterprise will be higher.

Vertical integration can lead to less flexibility in making decisions due to changes in the external environment. This arises because the competitive advantage of the company is associated with the competitiveness of suppliers or buyers included in the integration process.

It can also create significant obstacles to the exit, as it increases the degree of attachment of the company's assets. They will be much more difficult to sell in the event of a decline.

There is a need to maintain the initial and final stages of the main

The activities of modern companies proceeds in conditions of a rapidly changing competitive environment, which is due to the processes of globalization, liberalization of markets, as well as technological progress. The company's success in such a situation largely depends on the effectiveness of interaction with other companies at various stages of creating and promoting the final product or service to the end user, in other words, from the effectiveness of vertical integration.

The main purpose of this article is to consider the concept of vertical integration, a comprehensive analysis of theoretical approaches to the explanation of this phenomenon, which did not pay significant attention in the literature earlier, as well as the creation of the theoretical base for explaining the processes of vertical integration in the automotive industry. The main source of information in writing the article was the works of R. Cowus, O. Williamson. Ademanak. R. Harriegen, J. Stigler, V. Abernasi, K. Erroow, R. Blair, R. Basel, devoted to the consideration of the issues of vertical integration, as well as a number of articles in scientific journals.

The object of study in this article is the economic theories that are used to explain the vertical integration of the company. At the same time, the object of analysis, the arguments given to the protection of vertical integration, contribution to the theoretical substantiation of vertical integration, as well as their limitations are considered.

Vertical integration is the process of incorporation in the structure of companies that are associated with a single technological chain associated with it, or the merger of the stages of the production of a single technological chain and establishing controlling one company over them. At the same time, the production stage is understood as a process, as a result of which added value added to the initial cost of the product, and the product itself moves along a chain to the final consumer.

The main difference in the definitions of vertical integration by scientists is the degree of control of one firm over another, which arises as a result of the integration of various stages of the value chain.

Thus, Professor of the Massachusetts Institute of Technology M. Ademan believes that the firm is vertically integrated when the goods and services are moving from one unit to another, which could be sold on the market without further recycling. This definition reflects the opinion of the majority of scientists that the vertical integration implies one hundred percent control of the firm over several production stages. Such a definition excludes the flexibility of the company when choosing the degree of vertical integration, as well as the possibility of implementing quasi-integration strategies.

Professor Harvard University K. R. Harrygen gives a wider definition of vertical integration as a method for increasing the value added when creating a product or service and promotion to the final consumer. Such a point of view involves the diversity of the forms and the degree of control of the relationship between different stages of production, including their disintegration. The last phenomenon is observed in many industries, for example in the automotive industry.

Depending on the direction of vertical integration, allocate:

• - integration "forward", or direct integration, involving the integration of one of the stages of the value chain with subsequent stages of production and sales. An example of such integration may be the integration of the stages of assembling cars and their distribution;
• - Integration "Back", or reverse integration at which one of the stages of the value-added chain with previous stages of the technological process occurs. For example, a car assembly firm is vertically integrated with supplier of component materials for assembly.

Depending on the degree of integration, consider:

• - complete integration;
• - Quasi-integration requiring fewer investments and allowing companies to remain freer.

Quasi-integration can exist in the form:

• - long-term contracts;
• - joint ventures and strategic alliances. With this form of the company, they combine certain resources to achieve a general result, while remaining independent in solving other issues;
• - licenses for the right to use technologies. In this case, we are talking about vertical integration, in which one of the integrable stages is the development of technologies and R & D. Full vertical integration can be replaced by a license agreement, if the developed technology is difficult to copy and additional assets are not required to sell such technologies, for example marketing specialists;
• - ownership of assets. The company has ownership rights to certain assets at various stages of the technological chain, while the management of such assets carry out external contractors. For example, car manufacturers own specialized tools, snap, templates, forms for stamping and casting, without which the production of components is impossible. They conclude contracts with contractors for the production of such components, remaining the owners of the means of production, thus preventing the possibility of violation of contractors from contractors and guaranteeing supplies;
• - franchising. The franchisor is the owner of intangible assets (for example, brand), controls prices, product quality, level of service, while minimizing financial and managerial resources.

At the moment, there is no common theory of vertical integration in economic science and the explanation of its existence occurs using various theories and approaches.

For a long time in neoclassical direction of economic theory Taking into account one of the assumptions about the existence of competitive markets, through which effective placement of resources occurs, the only justified case of vertical integration was the existence of a continuous technological relationship of various production stages. It is assumed that to achieve the effectiveness of consecutive processes that coincide over time and space, as, for example, with the production of steel, common property is necessary. In accordance with this approach, vertical integration in the automotive industry as discrete production does not make sense.

This approach is unjustified, since, as soon as various scientists have proven, the market is not an ideal resource allocation mechanism, in addition, in the history of the automotive industry there are many examples of successful vertical integration.

 

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