Page 3: Types of integration
The three main types of integration for organisations are described according to the direction of the integration.
This occurs when one organisation takes over another at an earlier or later stage of production or work. For example, if HMRC bought up some of the businesses that supply it with paper, this would be described as backward vertical integration. Backward means that integration is at an earlier stage of production. If HMRC was to take over some of the work carried out by accountants in calculating tax payments for taxpayers, this would be called forward vertical integration. Forward means the integration occurs in part of the process that is nearer to the customer (in this case, the tax payer).
The main reasons for forward vertical integration are to make sure that a business:
- has somewhere to sell its product
- controls where and how it sells its product.
The main reasons for backward vertical integration are to ensure that a business:
- can get supplies
- has control over the quality of supplies.
This occurs when one organisation integrates with another business at the same stage of production or work. The creation of HMRC from two tax-collecting bodies is an example of horizontal integration. The main reasons were to:
- bring together people doing similar jobs
- give customers a better service
- achieve lower costs.
This occurs when a business merges with another that produces a completely different product. An example might be HMRC integrating with a cake maker. A major reason for this is to try and spread risks by producing more than one product. For example, many tobacco firms have bought businesses in areas such as hotels and leisure.