Integration (AQA A Level Business): Revision Note

Reduces the cost of production as middleman profits are eliminated

Lower costs make the firm more competitive

Greater control over the supply chain reduces risk as access to raw materials is more certain

The quality of raw materials can be controlled

Forward integration adds additional profit as the profits from the next stage of production are now included

Forward integration can increase brand visibility

Diseconomies of scale occur as costs increase, e.g. unnecessary duplication of management roles

There can be a culture clash between the two firms that have merged

Possibly little expertise in running the new firm results in inefficiencies

The price paid for the new firm may take a long time to earn back

A rapid increase of market share

Reductions in the cost per unit due to economies of scale

Reduces competition

Existing knowledge of the industry means the merger is more likely to be successful

The firm may gain new knowledge or expertise

Diseconomies of scale may occur as costs increase, e.g. unnecessary duplication of management roles

There can be a culture clash between the two firms that have merged

Spreads risk across industries

Uses surplus cash and skills elsewhere

Key expertise, such as strong financial management or marketing know-how, can be shared with all part of the business

Limited management know-how in unfamiliar sectors

Research may be required to understand trends and customer needs

Greater organisational complexity

Both companies said the cost of rolling out 5G was too big for them to handle alone

By joining forces they can

• Pool their money to pay for new 5G masts and fibre cables

• Save £700 million a year by sharing towers, shops and support staff instead of running two separate networks

• Become a strong brand that can compete on price and coverage with the two bigger rivals, BT’s EE and Virgin Media O2

Virgin Media had the fastest home broadband, while O2 had one of the biggest mobile networks

Putting them together allows the new firm to

• Sell bundles that give customers fast home internet and mobile service on one bill

• Share the cost of upgrades to cables and 5G over several years

• Increase profit by £540 million a year within five years by using the same call centres, shops and marketing

Joining two firms lets them combine production facilities, networks, and support functions

Fixed costs are spread over more units and duplicated activities are eliminated

The result is a lower average cost per unit and higher profit potential

The 2020 T-Mobile and Sprint merger created synergies of at least $43 billion by merging networks and closing down duplicate sites

This made it cheaper to roll out its nationwide 5G service

Instead of building a presence from scratch, a firm can acquire another that already has customers, stores, or distribution channels in the desired market

This saves time and reduces risk

The Amazon and Whole Foods merger in 2017 instantly created a physical retail presence for Amazon and a premium grocery brand

A merger can secure specialist know-how, patents or ways of working that improve a business's product without time-consuming in-house R&D

In 2006 Disney paid about $7.4 billion to bring Pixar’s cutting-edge computer-animation talent in-house

The merger increased Disney’s animation output and boosted its box-office performance

Absorbing a fast-growing rival can protect a business's market share and reduce future price competition

Facebook merged with Instagram in 2012, preventing a potential challenger from attracting its users

A larger market share can improve bargaining strength with suppliers and retailers

It may allow the firm to set prices more confidently (within legal limits)

Anheuser-Busch's 2016 takeover of SABMiller means that the business produces 30% of all beer sold worldwide, far more than its next largest rival, Heineken

Rapid expansion with little capital

• Franchisees pay most start-up costs, so the parent company can open many outlets without large new loans

Motivated local owners

• Each franchisee has money at stake, so they work hard and know their local customers better than head-office managers might

Stronger joint marketing

• National advertising, brand guidelines and bulk purchasing negotiated by the franchisor give every outlet a bigger presence than it could afford alone

Lighter day-to-day management workload

• The franchisor focuses on branding, supply chains and support while franchisees run daily operations

Less direct control

• If a franchisee cuts corners, product or service quality can fall and damage the whole brand

Shared profits

• A share of each outlet’s revenue stays with the franchisee, so the franchisor earns less per unit than from company-owned stores

Risk of conflict

• Disputes over fees, franchise territories or new policies can arise and may require costly legal or management time to resolve

Ongoing training and support costs

• The franchisor must provide initial training, audits and continual guidance to keep standards consistent across all outlets