A radical change occurred in the operation and structure of the American businesses in the late nineteenth – early twentieth century. Before 1870 an average factory had no more than $1,800 in investment, and even textile factories held investments under a million dollars. Subsequent decades saw the surge in mergers and acquisitions, and a flow of rapid consolidation of capital. Most of this process occurred because of vertical and horizontal integration.
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In this period companies usually grew in consequence of vertical and horizontal integration. Vertaical integration meant the combination of different stages in the process of production and distribution. For example, U.S. Steel combined several processes: it extracted ore from the ground, carried out its transportation to the mills where U.S. Steel transformed it into steel and produced finished goods, and then undertook the shipment to wholesalers. A large meat packing house like Swift or Armour bred cattle, slaughtered it, transported it to a trading outlet and then acted as a wholesaler.
Horizontal integration envisaged the production of a wide array of products and moving into related business fields. For example, unlike companies focused on a single product like cast iron or nails, U.S. Steel in the 1850s offered its clients a broad assortment of metal goods.
Vertical integration, despite possibly high initial outlays and possible problems in exiting the arrangement, generates distinct benefits for the organization. First of all, expansion of business offers significant economies of scale. The most viable source of economies of scale is the possibility to spread fixed costs over a greater number of output units, for example to use the same premises for manufacturing a greater number of goods. As a production unit grows, the company is able to realize synergies, that is, eliminate redundant operations and lay off extra workforce. Although socially painful, layoffs allow the company to concentrate its resources on the key areas, enhancing the productivity of its employees.
Economies are also achieved through reduction of purchasing and selling costs that result from the realization of synergies in these operations. For example, the company only has to spend on one marketing campaign promoting the company’s corporate image as opposed to the two campaigns that were previously realized by two separate entities.
Besides, through vertical integration the organization is able to advance coordination of its functions and capabilities, enabling better communications between parts of the whole.
The company that absorbs other businesses to embrace the whole process can benefit from the realization of the economies of speed. Economies of speed mean that the product can move quickly from the input to output, thus increasing the throughput of the manufacturing process. Time previously wasted on negotiations of orders and management of a long stream of supplies is now freed up, and the speed of production increases.
If the company owns and uses proprietary technology, vertical integration allows it to protect this know-how as information stays within the company and will not be lost through sharing it with outside sources.
Horizontal integration also enables the company to realize economies of scale, contributing to the bottom line. Even if products are diverse, the company can still eliminate some of the technical functions, such as human resource management, security, etc.
Besides, a company that absorbs other entities that produce related products will be able to accumulate greater market power. The organization will be able to offer its customers a wider range of products and in this way become better known to its customers. More often than not, a company that has made a reputation with one or several successful products will be able to sell other products to customers who already have a positive perception of the quality and value associated with this company.
To sum it up, there were viable grounds for 19th- early 20th century companies to integrate both vertically and horizontally. One of the main driving forces behind production consolidation was the realizations of economies of scale and speed, achieved through better coordination of activities, lower transportation costs and realization of synergies. —————————————————————————–
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