Business Organisation and Policy - Book Report/Review Example

Business Organisation and Policy Table of Contents Introduction 3 Business Policy and Its Importance in an Organization 4 Business Integration 5Vertical Integration 5 Backward Integration (Vertical) 6 Forward Integration (Vertical) 7 Horizontal Integration 9 Conglomerate 10 Advantages and Disadvantages of Vertical Integration 10 Advantages and Disadvantages of Horizontal Integration 12 Conclusion 15 References 16 Bibliography 19 Introduction Business policies are very essential for an organisation to function in a systematic order. The necessity of business policy can never be denied. It helps the management of the organisation in decision making process as well as further assists towards the direction and the destination. The management of the organisation is responsible to take decisions regarding the operations of the business, for instance, what is the business of the organisation or what would be the future operations of the organisation, will the organisation to operate in the same business or would merge with other firms. The paper will identify the need of business policy in the context of present day’s business operations along with the advantages and disadvantages of vertical as well as horizontal integration. Business Policy and Its Importance in an Organization Business policy can also be referred to the strategic decisions made by the higher level management of the organisation which are mostly subjected to the sustainability of the organisation. Business policy and strategic management are interchangeable. Business policy is believed to provide with a framework with the help of which the corporate plans are developed. This is observed to be very effective in today’s context as the business environment is experiencing tremendous change. In addition to it, the markets are tending to become very competitive in nature. An organisation focuses on developing business policy so that it can achieve its objectives in a systematic way (Moshal, 2009). According to observation made by Christensen, business policies can be described as the functions which are to be carried out by the top level management of the organisation. It is the responsibility of the higher authority. The main purpose of developing the business policy is to address crucial problems that can affect the success of the organisation in the long run. The higher authorities are entitled to take decision regarding the organisation in the future perceptive (Moshal, 2009). Mission and vision of the organisation is developed as a part of the business policies by the management with an intention to incorporate these developed policies in the organisational culture (Moshal, 2009). Mission of the organisation states the significant characteristics of the organisation. It helps to identify the reasons for its existence as well as the nature for the business. The mission of the organisation is considered to be the main motto of the organisation as it identifies its customers. It is indeed very essential because it serves as the definition to the organisation. The main objective behind preparing mission of the organisation is to focus on the actual business operation of the organisation, for example, organisational strategic business units and the basic strategy of the organisation (Universidad de Huelva, 2011). Vision of the organisation can be referred as the source which acts as the inspiration for the employees of the organisation. This effectively helps in motivating the employees of the organisation. This helps in shaping the future of the organisation with respect to attaining the sustainability (Sabrautzki, 2010). Business Integration Integration, in general sense, is merging or combining the parts together with an intention to make it work together or form an entity together. In the context of an organisation, integration is an action taken by the business firm that enables it to bring different products of the various manufactures’ together so that a smooth working system is developed. Nowadays, organisational integration is occurring tremendously. This is the result of increasing importance of information technology in organisational activities. This is further assisted by the internal re-organisations and business process re-engineering efforts. The high frequency of mergers which has been taking place in the last few years also has compelled an organisation to undertake integration (Oh & Et. Al., 2007). Vertical Integration Vertical Integration can be defined as “the degree to which a firm owns its upstream suppliers and its downstream buyers” (Shah & Et. Al., 2010). Vertical integration is referred as expanding organisational control over the inputs and the out ends of the environment by incorporating them into organisational boundaries. In simple words, when a company decides to expand its area of functioning in the terms of manufacturing that are of different nature but in the same production path it is known as vertical integration. Example of vertical integration would be a company which is dealing with manufacturing cars, decides to manufacture tyres. Vertical integration is further divided into forward integration and backward integration (Shah & Et. Al., 2010). Backward Integration (Vertical) Vertical integration is done by the organisation in which it gets engaged in the business operation such as manufacturing goods that is further used as raw material by the company to produces its own goods is known as backward integration. To be precise, if any organisation makes a decision of producing goods with an intention to assist its core product (such as raw materials) instead of depending on its suppliers for the required inputs is considered as backward integration. An example of backward integration will be a bakery firm buying a flour producing firm in order to reduce the risk related to the supply of the flour (Shah & Et. Al., 2010). Forward Integration (Vertical) If an organisation decides to expand its organisational operations (activities) downwards then it is known as upward integration. In this context it can be said that an organisation develops strategy that enables it to exercise control on the direct distribution of the produced goods. An example for forward integration would be a company selling its product directly in the local or international market rather than getting involved or selling through the intermediates. In this approach, the customers as well as the company both are benefitted as it helps in reducing the complexity of the operations, the cost and the expenses incurred in the process i.e. organisation to various intermediates then to different customers. The following is the process of backward and forward integration: Source: (Shah & Et. Al., 2010) Horizontal Integration Horizontal integration can be stated as increasing the range of the business operation by acquiring additional business activities by the organisation at the same level of the supply chain or value chain. This type of integration is very different from the vertical integration. In this context, this can be achieved by the organisation either by external expansion or internal expansion of the business operation by the means of mergers and acquisitions of the other organisations that are providing the customers with the similar kinds of products and services. The organisation can also diversify its business by expanding horizontally into those businesses which are not interrelated with its business operation. Example for horizontal integration would be an organisation which is involved with manufacturing of cars, merges or is taken over by another car manufacturing organisation. Conglomerate The company which operates its business in number of different sectors, which are heterogeneous in nature, is known as conglomerate organisation. In this context, the organisation which is involved with conglomerate operation of the business deals in numbers of other companies which are small in size. In this context, it has been observed that the company which owns the controlling power over the small units of business operates its business separately. Each and every conglomerate’s subsidiary runs its business separately. The organisation incorporating conglomerates does have certain business risks to be dealt with. As the business of the company participates in various industries, the risks involved too get multiplied (Investopedia, 2011). Advantages and Disadvantages of Vertical Integration Late 1990s is considered to be the era of innovation and industrialisation. Existing industries were developing and new organisations were being established. Vertical integration is considered as merger of two organisational firms that are producing different products but in the same product line. Merger of two companies dealing with the similar products in different point of supply chain can be considered as forward integration. This tends to draw the organisation closer to their customers (The Economist, 2009). The organisation which are involved in developing products that are further utilised by other organisations or is in the same product line are inter dependent to each other. In the period of 1990s, the advantages of vertical integration was that it allowed the organisation to exercise control upon the inputs which further helped the organisation to check the cost, reduce expenses, increase the quality and check the time taken to deliver the inputs. McKinsey and Company has stated, “Whereas historically firms have vertically integrated in order to control access to scarce physical resources, modern firms are internally and externally disaggregated, participating in a variety of alliances and joint ventures and outsourcing even those activities normally regarded as core” (The Economist, 2009). The organisations were interested in taking up vertical integration as it promised reduction of transportation of costs, improvement in coordination supply chain. It helped the organisation to achieve upstream and downstream profit margins. This also provided the organisation with an opportunity of enhancing product differentiation by increasing control over the available inputs. The example of implementation of vertical integration by a company is Dell. The company had been considered to be amongst the most successful computer manufacturing companies in 1990s. The founder of Dell, Michael Dell, combined the traditionally followed vertical integration of supply chain with particular features of the virtual organisation to develop the aspect named as ‘virtual integration’. The company assembles its product, computer, from the parts collected from other organisations which are suppliers of Dell and the relationships they cherish are very different and intense to be termed as just a traditional bond of buyer and seller. The company was not operating typical vertical integration through the information shared and the practise of such association can definitely be expressed as an approach of it which Mr. Dell further termed as ‘a tightly co-ordinated supply chain’ (The Economist, 2009). Vertical integration is very complex in nature and is very difficult to be implemented by the organisation successfully. It incurs high expenses while implementation. If any company wants to reverse vertical integration from the operations then it stands to a very challenging job. This approach of integration was good when the numbers of the companies were few and technology was just emerging. But in respect of the recent scenario, market demand has increased tremendously in accordance with needs and interests of the customers. The firm involved with vertical integration can comparatively incur higher price due to lack of competition of supplier. Developing of new competency by the organisation can lead to compromising with the existing competency which further may have adverse impact on the sale of the products in the market (Frozen North, 2005). One of the examples of vertical integration being avoided by the business firms is Ford. The company is no longer using its sand mine of St. Paul factory for the purpose of making windshields glasses for its cars since it is much cheaper to purchase them which are made in other factories that manufacture windshields glasses (Frozen North, 2005). Advantages and Disadvantages of Horizontal Integration Horizontal integration is increasing its demand among the industries. Unlike vertical integration, it does not involve any long process similar to the process that the organisation which has accommodated horizontal integration in its business operation face. Product before reaching to the customers goes through various steps in the process i.e. from selecting raw materials to making it available to the customers. If a company decides to operate all of the steps by its own, for instance, produce all of its own raw materials, then the hierarchy tends to become much tougher. To be clearer with the idea of benefit obtained by incorporating horizontal integration in the business operation, an example can be taken of the company which manufactures computer. Usually, the company buys the plastics and liquid crystal display (LCD) from the outside vendors. But instead of doing so, if the company decides on manufacturing those materials by itself then the process would get stretched and even delay might arise due to the extended operations of the organisation. Moreover, buying required materials from outside vendors can proof to be profitable as the presence of competitive number of vendor in the market can reduce the price of the materials directly reducing the cost (Cal Poly, 2011). The key feature of the horizontal integration is that it shortens the operation of the organisation. For instance, the company who is involved with the manufacturing the computers will only concentrate on manufacturing the prescribed goods rather than getting involved with other services. This will help the company to develop competencies which cannot be duplicated or is very hard to be emitted by the rival companies. Further, the advantage of horizontal integration is that it allows the companies to increase its market power, making the market position stronger (Cal Poly, 2011). One of the examples of the company which has adopted horizontal integration is Apple Inc (Takahashi, 2009). Most of the companies dealing with conglomerate tend to become very complicated and difficult in managing in the long run. Many companies have failed to maintain conglomerate in the long run. This involves tremendous managerial skills as well as market knowledge. The horizontal integration does come with certain drawbacks as well. As it involves with acquisition of other firms (mostly competitors), the company can enjoy the benefit of larger market share. But in the process, if the industry, where the company operates in, gets concentrated, which can further lead to anti-trust along with legal issues. The management of the organisation needs to gather adequate information related to the company before going into horizontal integration. As in absence of the relevant information, the organisation might face failure. Conclusion Business policies are essential parts of the organization. It helps the organization to attain its objectives by guiding it towards them. Industries in late 1990s were observed to be involved in vertical integration which allowed them to attain greater customer attention. But in due process, the importance of vertical integration was over shadowed by the requirement of horizontal integration. The scenario of market has changed, so has changed the customers’ needs and demands. To meet the customers’ interests and with an intention to persuade the sustainability by the organisation, horizontal integration has proved to one of the best strategies in respect of today’s context. In late 1990s, vertical integration sounded best as they provided the company with better opportunity of product differentiation with the means of innovation and technology. Then minimum numbers of organisations were operating in the market and very few could provide the customers with the innovative products. The decisions taken by the management to incorporate vertical integration in the business operations was considered to be a good decision but with increasing demand and advancing technologies the companies are undergoing horizontal integration. Now-a-days, the numbers of the players (companies) have increased giving tough competitions to the existing established companies. Global adaptation of horizontal integration over vertical integration is increasingly in demand due to the changing needs of the customers as well as the companies to attain sustainability. References Cal Poly, 2011. Advantages of Horizontal Integration. Horizontal Boundaries of the Firm. [Online] Available at: http://www.google.co.in/url?sa=t&rct=j&q=the+advantages+and+disadvantagse+of+horizontal+integration+in+the+industries&source=web&cd=7&ved=0CEwQFjAG&url=http%3A%2F%2Fagb.calpoly.edu%2Fshurley%2Fagb450%2Fpresentation1.ppt&ei=ndjMTuW_LofVrQeHqZHaDA&usg=AFQjCNEAnXZ64Iulz-NSeww2k559g77oSA [Accessed November 22, 2011]. Frozen North, 2005. Transparent Horizontal Integration equals Bad Customer Experience. Why Vertical Integration Doesnt Work. [Online] Available at: http://www.frozennorth.org/C509291565/E668712860/index.html [Accessed November 22, 2011]. Investopedia, 2011. Conglomerate. What Does Conglomerate Mean? [Online] Available at: http://www.investopedia.com/terms/c/conglomerate.asp#axzz1eQiqUf3o [Accessed November 22, 2011]. Moshal, B. S., 2009. Organisational Theory and Behaviour. Ane Books Pvt Ltd. Oh, L. B. & Et. Al., 2007. A Model of IT-enabled Organizational Integration and Sustained Competitive Advantage. 20th Bled eConference eMergence: Merging and Emerging Technologies, Processes, and Institutions. [Online] Available at: https://domino.fov.uni-mb.si/proceedings.nsf/0/ff81672e98fd1171c12572f0004a4814/$FILE/60_Oh.pdf [Accessed November 22, 2011]. Sabrautzki, S., 2010. Strategies, Mission, Vision, Goals. GRIN Verlag. Shah, M. & Et. Al., 2010. Vertical and Horizontal Integration. Scribd. [Online] Available at: http://www.scribd.com/doc/29777105/Horizontal-and-Vertical-Integration [Accessed November 22, 2011]. Takahashi, D., 2009. Apple Inside? The Perils For Apple In Creating Its Own Chips. VentureBeat. [Online] Available at: http://venturebeat.com/2009/04/29/apple-inside-the-perils-for-apple-in-creating-its-own-chip-team/ [Accessed November 22, 2011]. The Economist, 2009. Vertical Integration. Idea. [Online] Available at: http://www.economist.com/node/13396061 [Accessed November 22, 2011]. Universidad de Huelva, 2011. Strategic Management and Business Policy. Strategic Thinking. [Online] Available at: http://www.uhu.es/45122/temas/THEME2_presentation.pdf [Accessed November 22, 2011]. Bibliography Shukla, M., 2004. Understanding Organisations: Organisational Theory and Practice in India. PHI Learning Pvt. Ltd. Read More