Management and the Organization - Essay Example

Management and the Organization Companies often adopt different structures, concepts and principles to stay operating in the business world. The strategic decisions made by the management involve the segregation of duties, decisions about control and overall operational decision making. There are a number of ways in which a business may be managed and run. In this context, the two integration concepts are of immense importance including vertical and horizontal integration. This paper aims to analyze why some businesses are vertically integrated while others are not. In order to analyze the situation, the paper uses various examples where vertical integration is found and discusses why some companies avoid vertical integration. This paper also involves the discussion about the advantages that vertical integration brings for the business. In order to understand the concept of vertical integration, let us first examine the contrary concept of horizontal integration. The term horizontal integration implies an organization which is consolidated or merged with another (or other) businesses with similar activities and operations. An example of horizontal integration is the merger of two small schools. Both the organization has almost similar operations, aims and methods. The merger of such organizations may bring economies of scale, reduced overhead expenses and so on. On the other hand, vertical integration is the concept which describes “the coordination or linkage of different units or stages of the production process” (Heshmat 2001, p.101). An example of such integration may be the consolidation or coordination of suppliers, manufacturers and distributors in order to avoid the time overlap. This kind of coordination helps in maintaining the overall lifecycle and production process of a product. It helps in identifying the true worth, life and cost of a product. Such coordination skillfully manages the production process without any delays in getting raw material from the supplier, unnecessary delays in production or unavailability of product when the distributor or seller needs it. Hence, companies integrate vertically in order to make their business more accurate in terms of availability, quality and costs. Vertically integrated organizations are more reliable in terms of quality as, for instance in production businesses, the integration of suppliers, manufacturers and distributors help in maintaining the quality standards using the same quality of material every time in the production process, the same level of competence in the production procedures, the same level of cooperation from the distributor and the sustained price of the product offered to the end user. This coordination helps in building customer’s trust as no delays are found, in the normal course of action and unchanged quality or standard of goods or services are being provided every time (Bouman 2009; Taylor & Frost 2006). Vertical integration refers to the control which a company has over its inputs and distribution of outputs. A company may tighten its control over inputs or distribution of outputs by increasing the level of coordination or integration. This level of control helps in maintaining the quality of products and processes that are involved. In order to further understand the concept and its benefits to an organization, it is important to discuss the types of vertical integration. There are basically three types of vertical integration; which are: backward (upstream) vertical integration, forward (downstream) vertical integration and balanced vertical integration. Backward integration refers to the control which a company has on its suppliers and inputs. To understand it better, a simple example of backward integration may be the acquisition of chemical supplying firm for pharmaceutical production. On the other hand, forward integration refers to the level of control which a company has on the distributors of its products. An example of forward integration may be the acquisition of pharmacy to make it available for the consumers. A company having control over some or whole of its input and distributors is referred to as a balanced vertical integration approach. This approach involves the control over all operations of the business from acquiring raw material to the distribution of the end product. As the examples used, a pharmaceutical production company may acquire or integrate with both the suppliers of chemicals and pharmacy to sell the medicines (Taylor & Frost 2006) Whichever form of vertical integration is used, there are relevant related benefits which a firm enjoys because of such approach. This involves economies of integration in terms of costs, technological use, coordination and economies of internal control. The acquisition or higher control on the inputs, for instance, help in maintaining the availability of inputs without delays, controlled quality of inputs, minimal costs of scheduling, coordinating and emergencies and so on. Businesses, hence, adopt such approaches in order to reduce costs and maintain reliability of their products and services (Mitra 2009; Forstater 2007). Vertical integration, however, is costly for smaller organizations who do not have sufficient resources to acquire control over its inputs and distributors. For instance, a small furniture manufacturing business may not be able to have control over the distributors of wood or other supplies and hence, they would require contractual basis relationships with the suppliers. Similarly, it will not be possible for the furniture manufacturer to own a show room or furniture display shop within the scarce resources available. If such small organizations go for integration by spending much of its finances in gaining control, they will not be able to meet the requirements of the business processes. Hence, size of the business, nature of the business and resources available are some of the factors which enable the management to decide on the approach of integration. Smaller organizations may, however, go for horizontal integration where they share common goals, processes and control. Such mergers are fruitful as they may reach economies of scale, efficiency and reduced fixed and variable overheads per unit. The professionals working in collaboration may aid each other by sharing their ideas and work styles which would help smaller organizations in increasing their profits and improving their performance and reputation (Porter, 1998 pp. 302-306). An example of vertically integrated organization in the real life is the case of Exxon Mobil. It controls all its operations and distribution cycle of its product. The oil company controls all the operations from exploring crude oil to selling it to its final consumers. It explores, extracts, refines, transports and finally distributes it all by itself. It has integrated all the production and distribution processes which has helped it in achieving economies of scale, efficiency and time. It controls its operations and provides a high quality output to the consumers on a timely and regular manner (Greer 1984 p. 383). The businesses which adopt vertical integration approach are highly probable to reduce their transaction costs. Today’s modern business environment where computers and other technologies are available to aid the communication and accounting functions, the integration approach helps in maintaining the transaction costs. The integrated organizations generally possess a centralized communication and accounting system. This first of all, reduces the transaction costs and secondly provides a way to the principal authority to keep track of the operations and costs of each process of the business. Vertical integration hence, is cheaper in terms of transaction cost. It is also safer when it comes to tracking the operations and costs of any organization. The standards of quality or service are also maintained by the business which adopts a vertical integration approach. However, the costs of managing the organizational structure may rise due to the large organizational structure. There will be a need to control the operational performance of every sector of the business which will require more time and expertise as different units of the organization will be working on different processes. An integrated car manufacturing business, for instance, will have different departments (Harrigan 1983; Mitra 2009). A department producing tires will have different operations then the one manufacturing engines or the one working at the car showroom. Hence, the costs to manage and track the operational efficiency of each department will require additional staff, work and time. This will involve more costs in maintaining the success of integration of the businesses and producing the required outcomes. Without tracking the efficiency and work performance of each process or department working in a business environment, integration approach is more likely to fail the overall business profitability (Cai & Obara 2009; Forstater 2007). In conclusion, we can say that the organization may choose between the structures of the organization depending on a number of factors. These factors include but are not limited to the size, resources and nature of the business. Some businesses adopt vertical integration approach owing to the benefits this approach may bring. However, the decision of opting for vertical, horizontal or some other approach depends on the advantages it brings and the ability to stand the disadvantages associated with it. Managers must think critically and wigh between the positive and negative outcomes of choosing any approach before applying it practically. The short term and long term benefits and loses must be accounted for before adopting any approach. A vertical integration approach is helpful in reducing costs but is difficult to manage. Hence, there is a need to carefully consider each aspect of business’s operations which are affected by vertical integration approach before adopting it. Bibliography: HESHMAT, S. (2001). An overview of managerial economics in the health care system. Albany, N.Y., Delmar Thomson Learning. PORTER, M. E. (1998). Competitive strategy: techniques for analyzing industries and competitors : with a new introduction. New York [etc.], The Free Press. GREER, D. F. (1984). Industrial organization and public policy. New York, Macmillan. Top of Form CAI, H., & OBARA, I. (2009). Firm reputation and horizontal integration. RAND Journal of Economics. 40, 340-363. Top of Form FORSTATER, M. (2007). Economics. Little book of big ideas. Chicago, Chicago Review Press. Top of Form HARRIGAN, K. R. (1983). Strategies for vertical integration. Lexington, Mass, Lexington Books. Bottom of Form Top of Form MITRA, R. (2009). Economies of scope in industry equilibrium: vertical integration vs. outsourcing. Thesis (Ph. D. in Economics)--University of Wisconsin--Milwaukee, 2009. Top of Form BOUMAN. (2009). Microeconomics. Kendall Hunt Pub Co. Top of Form TAYLOR, J. B., & FROST, L. (2006). Microeconomics. Milton, Qld, John Wiley & Sons Australia. Bottom of Form Bottom of Form Bottom of Form Bottom of Form Bottom of Form Read More