Question about vertical vs. horizontal integration: Talia owns the largest producer of ice cream in Easteros. She currently relies on several small manufacturers to produce the packaging for her products. She has contracts with each of her manufacturers and has quarterly meetings with them to discuss business for the next quarter. Other than this interaction, she has little oversight over their work. Over the last year, Talia’s business has boomed, and she is wondering whether she should begin packaging her product in-house. Write a brief recommendation to Talia, highlighting the costs and benefits of vertical versus horizontal integration.

The main disadvantage of vertical and horizontal integration is the high cost of acquisition. Talia will have to meet the operational and running costs of any business she plans to buy. However, in the long run, this strategy can lead to more profits for the business. Buying another business leads to less competition and allows Talia to get a bigger share of the market.

Expert Answers

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Horizontal integration is when a business merges or takes over another business in the same industry. Vertical integration is when a business acquires another firm in the same production or distribution stage of its operation or decides to own one or more stages of its distribution cycle.

If Talia begins packaging her products in-house, it means she’s going for vertical integration. There will be less contact with manufacturers, and she will have more control over how the packaging is done. In-house packaging can help her lower production costs because she’s the one who sources the inputs. However, there’s a downside. Since Talia’s company now has a packaging division, some of the business earnings will be diverted there. She has to keep an eye on both sides of the business, which may be tiresome. Also, to lower her packaging costs, Talia may replace or do away with some of the raw materials. As a result, the quality of the packaging may be compromised.

However, if she goes for horizontal integration and acquires a small ice-cream company in the neighboring town, she won’t have to worry about the package quality since the business is no longer involved in that stage of the production process. Instead, she will gain entry into a new market and combine resources with the other company. Unfortunately, this strategy won’t give Talia control over her distribution process, and she may have to increase prices if the suppliers do the same.

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