Chain of production

Chain of production

1. What is it?

   • Warburtons example...

2. Vertical Integration

   • Forward integration
     • Primary business buying secondary...
       • Or secondary buying tertiary
   • Backward integration
     • Secondary business buying primary...
       • Or tertiary buying secondary
   • Advantages
     • A bakery would get somewhere to sell their products
     • Immediately has supplier - itself
     • Cuts out middle men and their costs
       • Supplier doesn't need profit
     • Controls delivery and quality of produce
     • Increased control of the market
   • Disadvantages
     • Increase in costs
       • May need to recruit staff to run other sections of the business
     • Inexperience in the field could be costly
     • Possible diseconomies of scale may arise in administration

3. Horizontal Integration

   • Buys another business from the same sector
     • Ie a shop buying another shop, a tree logging company buying a plant nursery - form a larger business through a merger
   • Advantages
     • Reduces competition
     • Increase in market power
       • More control of sector, more influential so power with suppliers, take advantage of economies of scale
     • Greater control of prices
     • Gain new ideas from the other business
     • New business may not need all the workers - become more efficient and more profitable
   • Disadvantages
     • For Firms
       • Businesses may have different objectives and targets - conflict
       • Expensive to merge/ takeover
       • Communication problems - differing opinions
     • For consumers
       • Prices can increase - less choice - lack of competition
       • Monopoly/ domination of the market
         • Competition commission

4. Diversification

   • Example - a market gardener whose property is next to McDonalds car park, turns part of property into a mini golf course to make additional income from people who go to McDonalds
   • Reasons
     • Spread risk across a number of products
       • If a product fails due to market conditions the others in different markets should not suffer
     • Good way of expanding if current market already full
   • Advantages
     • Spread risk
     • Obtain other revenue sources
     • Increase range of products they make or sell
     • Develop into a conglomerate
       • Buys firm selling completely different products, Ie. a clothing manufacturer buying a TV manufacturer
     • Take advantage of existing expertise, knowledge and resources
   • Disadvantages
     • May result in slowing growth of core business
     • Adds management costs
     • Loses incured during market consolidation process
     • Complex dealings with legal requirements in different countries

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