United Methodist University

Ashmun Street
Monrovia, Liberia

Course Title: Fundamental of Supply Chain Assignment

Course Code: 231

Section: One (1)

Submitted To: Mr. Dioh Cox Podee

Submitted By: Joshua Beahn

ID#: 37228

Submission Date: May 22, 2025

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Table of Contents
Vertical Integration ....................................................................................................... 3
Advantages of Vertical Integration ................................................................................. 4
Horizontal Integration ................................................................................................... 4
Understanding Horizontal Integration ............................................................................ 4
Aspects of Horizontal Integration .................................................................................. 4
Horizontal Integration vs. Vertical Integration ................................................................. 5
Backward Integration ................................................................................................... 6
Advantages of Backward Integration .............................................................................. 7
Disadvantages of Backward Integration ......................................................................... 7
Forward Integration ...................................................................................................... 8
Acquisition .................................................................................................................. 8
Challenges with Acquisitions ........................................................................................ 9
Merger ........................................................................................................................ 10
Experience Curve ........................................................................................................ 11
Origin of the Experience Curve ..................................................................................... 11
Criticisms of the Experience Curve ............................................................................... 12
Learning Curve ............................................................................................................ 12
Learning Curve Formula............................................................................................... 13
Graphing Data ............................................................................................................. 15
References ................................................................................................................. 17
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Direction: Discuss the following:

1. Vertical Integration
2. Horizontal Integration
3. Backward Integration
4. Forward Integration
5. Acquisition Integration
6. Merger
7. Learning curve
8. Experience curve

Vertical Integration
Vertical integration is when a firm extends its operations within its supply chain. It means that
a vertically integrated company will bring in previously outsourced operations in-house. The
direction of vertical integration can either be upstream (backward) or downstream (forward).
It can be achieved either by internally developing an extended production line or by acquiring
vertically. The Four Degrees of Vertical Integration

1. Full Vertical Integration: Obtaining all the asset, resources, and expertise needed to
replicate the upstream or downstream member of the supply chain.
2. Quasi Vertical Integration: Obtaining some stake in a supplier in the form of
specialized investments or an equity stake to obtain agency benefits by increasing the
ownership interest in the outcome.
3. Long-term Contracts: A diluted form of vertical integration in which some elements
of procurement are held constant to reduce inconsistencies in product delivery while
holding costs constant to a certain extent.
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4. Spot Contracts: The point at which a firm is not vertically integrated is when the
firm relies on spot contracts to receive the immediate input necessary for its
production.

Advantages of Vertical Integration

The direct benefits of pursuing vertical integration are greater control over the supply chain
and lower variable production costs.

Horizontal Integration
Horizontal integration is a competitive strategy where business entities operating at the value
chain level and within the same industry merge to increase the production of goods and
services. The overall gain from a horizontal integration is an increase in the market power
and minimal loss for being non-integrated.

Understanding Horizontal Integration

Horizontal integration is a competitive strategy that can result in economies of scale,
competitive edge, increased market share, and business expansion. Businesses in strategic
alliances target outcomes that provide more resources, market, competence, and efficiency.
The two amalgamated entities should be better positioned to realize more revenue than they
would have when operating independently.
Horizontal integration may also involve the optimization of activities or the consolidation of
strategic business activities within the firm’s scope of processes and activities. It may arise
from expansion to new market segments, economies of scale, economies of scope and
experience, and the price difference in the factors of production.
However, these business combinations may create a monopoly power in an industry, which
may be a disadvantage to the consumer. The reduced competition may induce collusive
behavior, leading to increased prices for products.

Aspects of Horizontal Integration

There are several aspects that characterize a horizontal integration versus other business
combinations. They include:
• The direction of horizontal integration
• Profitability of integration
• Target of integration
• Forms and intensity of integration
Horizontal integration can be distinguished from conglomerate integration by taking into
account the direction. It is usually a preserve for companies with financial surpluses.
Horizontal mergers of related companies occur within the same industry or line of products
so that the entities involved can exploit their competencies.
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Companies merge and expand their activities as a unit in sectors related to associated
products or services to utilize their skills and resources. Businesses that aim to increase their
profitability can adopt horizontal integration within the same product lines.
On the other end of the spectrum, conglomerate diversification is for companies that strive
for growth. Notwithstanding this rule, some companies may use only the selected
competencies of horizontal integration.

Horizontal Integration vs. Vertical Integration

Horizontal integration and vertical integration are strategic alliances by companies in the
same sector. The horizontal integration of companies within the same industry attracts
businesses that target to reach a broader market or offer more products/services. It can lead to
product diversification, increased company size, narrow competition, and economies of scale.
A successful horizontal integration equips companies with the ability to cut down on costs by
using the same research and development, technologies, marketing and advertising,
production, and distribution. The need to acquire a new customer segment can also be a
reason for horizontal integration.
In a vertical integration, a business entity acquires another business operating in the
production process of the same industry. They are combinations with companies that are
upstream or downstream of the same product supply chain.
Companies may choose to undergo vertical integration to increase profitability, reduce
production costs, and strengthen their supply chain. Integrating vertically requires one
company that is higher or below in the supply chain process. They can draw several benefits
from vertical integration, including increased profits from the new business operations,
efficiency in the production process, and enhanced distribution and delivery.

Benefits of Horizontal Integration

1. Larger market share: Successful mergers create a large market share for the integrated
company or business units. Horizontally integrated firms improve market share by the
expansion of business activities, cost synergies in marketing, combined product base, and
shared technology, among others.
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2. Large customer base: When two companies come together, they also bring different
consumer bases. As a result, the new firm has access to a large customer segment.
3. Higher revenue: By increasing its market share and consumer base, the new company has
the ability to increase its revenue two-fold or more.

Backward Integration
Backward integration is a process in which a company acquires or merges with other
businesses that supply raw materials needed in the production of its finished product.
Businesses pursue backward integration with the expectation that the process will result in
cost savings, increased revenues, and improved efficiency in the production process.
Companies also use backward integration as a way of gaining competitive advantage and
creating barriers to entry to new industry entrants.

How It Works
A business that implements backward integration attempts to move backward in the supply
chain to the control of raw materials. The supply chain process starts with the sourcing and
delivery of raw materials to the manufacturer’s warehouse and ends when the final product
gets to the end consumer.
Raw materials are scarce resources that every business attempts to control, and lacking access
to such resources may cripple the operations of the business. In industries with high
competition, manufacturers often make attempts to buy suppliers as a way of cutting out the
middlemen and managing the increasing competition for scarce resources.
Example of Backward Integration
An example is a wine manufacturer that seeks to acquire a wine bottle manufacturing
company that owns the rights and technologies of manufacturing glass. By acquiring the wine
glass manufacturing company, the wine manufacturer will be in a position to control the
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quality of the manufactured glass, cost of production, as well as the quality of raw materials
used in the manufacturing process.
This will limit other wine manufacturers from buying wine bottles from that supplier. Also, it
will allow the acquirer to differentiate its wine bottles from those of the other competitors.
Since the raw materials for the manufacture of glass are scarce in nature, the wine
manufacturer will be in a position to manage the resource to make sure they are effectively
used to produce high-quality bottles.

Advantages of Backward Integration

The following are some of the benefits that companies enjoy when they implement backward
integration:
1. Better control
By acquiring the manufacturers of raw material, a company exercises greater control over the
supply chain process from the production of raw materials to the production of the end
product. First, the company will gain control over the quality of raw materials that are used in
the production of the end product. Also, by acquiring the supplier of raw materials, the
manufacturer will achieve greater control over the quantity and delivery of the raw materials
to its warehouse.
2. Cost control
The supply chain process comprises many middlemen, which means that each phase in the
supply chain includes a mark-up to allow the middleman to earn a profit. Thus, by the time
the product gets to the company’s warehouse, the price will have doubled or tripled. This will
make the finished product more expensive for the consumer.
By acquiring the supplier of the raw materials used in the production process, the company
will do away with the middlemen involved in the process and reduce the cost of purchasing
the raw materials. Controlling the entire supply chain will also reduce wastages, transport
costs, and other costs incurred before the raw materials are delivered to the company’s
warehouse.
3. Competitive advantage
Companies also use backward integration as a way to gain a competitive advantage over their
competitors. For example, in the technology industry, companies integrate backward as a way
of gaining access to patents, trademarks, and proprietary technology owned by other
companies in the industry.
Acquiring such companies prevents competitors from using the same resources, and other
firms are forced to look for alternatives in the market. Acquiring suppliers also create barriers
to entry. New competitors will face difficulties getting suppliers for the raw materials
required in the production process.

Disadvantages of Backward Integration

1. Inefficiencies
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Implementing backward integration can result in inefficiencies. By acquiring the supplier of

raw materials required in the production process, the company will limit competition,
resulting in sluggishness and lack of innovation. The company will be less motivated to
spend money on research and development. As a result, the quality of the company’s end
product(s) may decline, and the costs of managing customer complaints will increase.
2. Substantial investment
Another disadvantage of backward integration is the substantial investment that will be
needed to finance the acquisition. The company may be forced to utilize all its cash reserves
and even take up more debts to finance the acquisition. If the company is unable to repay the
debts or enjoy the benefits of the acquisition, it will face the risk of default and even
liquidation.

Forward Integration
While backward integration is the merging and acquisition of companies in the upper side of
the supply chain, forward integration is the acquisition of companies on the lower part of the
supply chain. In forward integration, the company is interested in acquiring distributors of its
products or the retail stores that sell the final products to the end consumer.
For example, a wine manufacturer may decide to acquire businesses with wine distributorship
rights or the retail chain stores that sell wine produced by the company. This will give the
manufacturer better control in getting the finished product to the consumer and in obtaining
first-hand information on the consumer’s experience with the company’s products.

Acquisition
An acquisition is defined as a corporate transaction where one company purchases a portion
or all of another company’s shares or assets. Acquisitions are typically made in order to take
control of, and build on, the target company’s strengths and capture synergies.
There are several types of business combinations: acquisitions (both companies
survive), mergers (one company survives), and amalgamations (neither company survives).
The acquiring company buys the shares or the assets of the target company, which gives the
acquiring company the power to make decisions concerning the acquired assets without
needing the approval of shareholders from the target company.
Learn more about share deals vs asset deals.
Acquisition vs. Merger
Mergers and Acquisitions (M&A) are similar transactions, however, they are significantly
different legal constructs.
In an acquisition, both companies continue to exist as separate legal entities. One of the
companies becomes the parent company of the other.
In a merger, both entities combine and only one continues to survive while the other company
ceases to exist.
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Another type of transaction is an amalgamation, where neither legal entity continues to

survive. Instead, an entirely new company is created.
Benefits of Acquisitions
Acquisitions offer the following advantages for the acquiring party:
1. Reduced entry barriers
With M&A, a company is able to enter into new markets and product lines instantaneously
with a brand that is already recognized, with a good reputation and an existing client base. An
acquisition can help to overcome market entry barriers that were previously challenging.
Market entry can be a costly scheme for small businesses due to expenses in market research,
development of a new product, and the time needed to build a substantial client base.
2. Market power
An acquisition can help to increase the market share of your company quickly. Even though
competition can be challenging, growth through acquisition can be helpful in gaining a
competitive edge in the marketplace. The process helps achieves market synergies.
3. New competencies and resources
A company can choose to take over other businesses to gain competencies and resources it
does not hold currently. Doing so can provide many benefits, such as rapid growth
in revenues or an improvement in the long-term financial position of the company, which
makes raising capital for growth strategies easier. Expansion and diversity can also help a
company to withstand an economic slump.
4. Access to experts
When small businesses join with larger businesses, they are able to access specialists such as
financial, legal or human resource specialists.
5. Access to capital
After an acquisition, access to capital as a larger company is improved. Small business
owners are usually forced to invest their own money in business growth, due to their inability
to access large loan funds. However, with an acquisition, there is an availability of a greater
level of capital, enabling business owners to acquire funds needed without the need to dip
into their own pockets.
6. Fresh ideas and perspective
M&A often helps put together a new team of experts with fresh perspectives and ideas and
who are passionate about helping the business reach its goals.

Challenges with Acquisitions

M&A can be a good way to grow your business by increasing your revenues when you
acquire a complimentary company that is able to contribute to your income.
Nevertheless, M&A deals can also create some hitches and disadvantage your business. You
must take these potential pitfalls into consideration before pursuing an acquisition.
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1. Culture clashes
A company usually has its own distinct culture that has been developing since its inception.
Acquiring a company that has a culture that conflicts with yours can be problematic.
Employees and managers from both companies, as well as their activities, may not integrate
as well as anticipated. Employees may also dislike the move, which may breed antagonism
and anxiety.
2. Duplication
Acquisitions may lead to employees duplicating each other’s duties. When two similar
businesses combine, there may be cases where two departments or people do the same
activity. This can cause excessive costs on wages. M&A transactions, therefore, often lead to
reorganization and job cuts to maximize efficiencies. However, job cuts can reduce employee
morale and lead to low productivity.
3. Conflicting objectives
The two companies involved in the acquisition may have distinct objectives since they have
been operating individually before. For instance, the original company may want to expand
into new markets, but the acquired company may be looking to cut costs. This can bring
resistance within the acquisition that can undermine efforts being made.
4. Poorly matched businesses
A business that doesn’t look for expert advice when trying to identify the most suitable
company to acquire may end up targeting a company that brings more challenges to the
equation than benefits. This can deny an otherwise productive company the chance to grow.
5. Pressure on suppliers
Following an acquisition, the capacity of the suppliers of the company may not be enough to
provide the additional services, supplies, or materials that will be needed. This may create
production problems.
6. Brand damage
M&A may hurt the image of the new company or damage the existing brand. An evaluation
of whether the two different brands should be kept separate must be done before the deal is
made.

Merger
A merger is an agreement that unites two existing companies into one new company. There
are several types of mergers and reasons companies complete mergers. Mergers and
acquisitions (M&A) are commonly done to expand a company’s reach, expand into new
segments, or gain market share. All of these are done to increase shareholder value. Often,
during a merger, companies have a no-shop clause to prevent purchases or mergers by
additional companies.
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Experience Curve
Introduced by the Boston Consulting Group, Experience Curve is a concept that states that
there is a consistent relationship between the cumulative production quantity of a company
and the cost of production. The concept implies that the more experienced a company is in
manufacturing a specific product, the lower its cost of production.
When the total production capacity (from the first unit to the last) doubles, the value-added
costs decline by a constant percentage. The value-added costs include the cost of
manufacturing, marketing, distribution, and administration.

Origin of the Experience Curve

The concept of experience curve was first introduced by Boston Consulting Group (BCG) in
the 1960s while analyzing cost behavior in companies. Bruce Henderson, the group’s
founder, led a study into a leading manufacturer of semiconductors to analyze the relationship
between cost behavior and production quantity. The research found that when the
manufacturer doubled the volume of production, there was a 25% decline in the overall cost
of manufacturing.
Boston Consulting Group defined the relationship as “experience curve,” where a company
gains more experience by producing more of a particular product. Additional research
conducted by BCG in the late 1960s and early 1970s revealed that the experience curve effect
for various industries ranged between 10% and 25%.
Graphical Representation

When representing an experience curve on a graph, the cost per unit of production is plotted
on the Y-axis, while the cumulative production quantity is plotted on the X-axis. The unit cost
of production includes the cost incurred by the company to add value to the product but
excludes the cost of purchasing the materials.
The curve shows that as the company increases its overall cumulative production quantity, the
unit costs decline at a constant rate. The decline goes on without limit and is surprisingly
consistent, even from one industry to another. In some cases, the absence of experience in
some industries may be viewed as an outcome of mismanagement.
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Based on the research conducted by BSG, we can deduce that the experience curve of lower
unit costs tends to become stronger for large businesses that are market leaders in their
respective industries.
Implications of the Experience Curve
A company that benefits from the effects of an experience curve enjoys several advantages
over its competitors. As the business grows and lowers its unit production costs, it will gain a
bigger market share over its rivals. It means that it will control a bigger portion of the market,
increasing its profit potential.
Since the company enjoys cost advantages over competitors due to the reduced cost of
production, it can develop a penetrative pricing strategy by setting a low price to attract more
customers to purchase its products. Other strategies used to increase market share include
increasing investment in marketing, production capacity, hiring more sales personnel, etc.
On the downside, the experience curve can sometimes come to an abrupt end when the
competitors discover the strategy and replicate the cost reductions without making huge
capital investments to gain experience. The experience curve can also come to an end when
new technologies are introduced, and the company will need to create a new curve. It must
upgrade its processes by replacing the old experience curve with a new one that allows it to
retain its competitive advantage.

Criticisms of the Experience Curve

1. Complacency
One of the criticisms of the experience curve is that it makes market leaders complacent with
their achievements. By getting the benefits of experience curve effects, the companies
become reluctant to continually innovate and lower the unit costs because of their experience.
As a result, such companies become satisfied with their level of achievement. They begin
resisting change, which may eliminate their cost benefits of the experience curve.
Competitors that replicate the strategies and adopt the latest technologies will easily surpass
the market leaders and achieve their own experience curve.
2. Inability to measure its effects
Another criticism of the experience curve is the inability to measure its effects. Most of the
time, its effects are closely related to economies of scale, and it will be impossible to
differentiate between the two. Economies of scale are the cost benefits gained due to an
increased level of production, whereas experience curve effects are the cost benefits achieved
through experience by performing repetitive tasks.
Both concepts are intertwined, and it is difficult to differentiate between experience and
increased level of production. It makes it difficult to measure the cost benefits of each
function.

Learning Curve
A learning curve graphically depicts how a process improves through learning and increased
proficiency. Tasks will require less time and resources the more they are performed. The
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learning curve was first described by psychologist Hermann Ebbinghaus in 1885 and is used
to measure production efficiency and to forecast costs.
Role In Business
Companies can derive the cost of producing a single unit of output based on the number of
hours needed, based on an employee's hourly rate. As a task is repeated, the employee learns
how to complete it quickly and reduces the amount of time needed per unit. A well-placed
employee should decrease the company's costs over time. Businesses can use the learning
curve to inform production planning, cost forecasting, and logistics schedules.
The learning curve is also referred to as the experience curve, the cost curve, the efficiency
curve, or the productivity curve because it provides cost-benefit measurements. The learning
curve is downward sloping in the beginning, with a flat slope toward the end. As learning
increases, it decreases the cost per unit of output initially before flattening out, as it becomes
harder to increase the efficiencies gained through learning.
Learning curves are often associated with percentages that identify the rate of improvement.
For example, a 90% learning curve means that for every time the cumulative quantity is
doubled, there is a 10% efficiency gain in the cumulative average production time per unit.
The percentage states the percentage of time that will carry over to future iterations of the
task when production is doubled.

Learning Curve Formula

The learning curve has a formula to identify a target cumulative average time per unit or
batch:
b
Y= aX
where:
Y=Cumulative average time per unit or batch
a=Time taken to produce initial quantity
X=The cumulative units of production or the cumulative number of batches
b=The slope or learning curve index, calculatedas the log of the learning curve percentagedi
vided by the log of 2

Example
Assume an 80% learning curve. Every time the cumulative quantity is doubled, the process
becomes 20% more efficient. Assume the first task takes 1,000 hours.

Now let's double the manufacturing output. The initial time spent on the first task will be
1,000 hours. However, the value for X will now change from one to two:
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The total cumulative amount of time needed to perform the task twice was 1,600. Since the
total amount of time taken for one task was 1,000 hours, it can be inferred that the
incremental time to perform the second task was 600 hours. This diminishing average
theoretically continues along the learning curve. For example, the next doubling of tasks will
occur at four tasks completed:

In this final example, it took a total of 2,560 hours to produce 4 tasks. Knowing it took 1,600
hours to produce the first two tasks, the learning curve indicates it will only take a total of
960 hours to produce the third and fourth task.

Learning Curve Table

The cumulative quantity must double between rows—to continue the table, the next row must
be calculated using a quantity of eight. The incremental time is a cumulation of more and
more units as the table is extended. For example, the 600 hours of incremental time for task
No. 2 is the time it took to yield one additional task. However, the 960 hours in the next row
is the time it took to yield two additional tasks.
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Graphing Data

Because learning curve data easily creates trend lines, learning curve data is depicted
graphically. There are several data points to choose from, one of which is the total cumulative
time needed to produce a given number of tasks or units. In the graph below, the learning
curve shows that more time is needed to generate more tasks.

Learning Curve, Cumulative Production Time.

However, the graph above fails to demonstrate how the process is becoming more efficient.
Because of the graph's upward sloping curve, it appears it takes incrementally more time to
perform more tasks. However, due to the nature of the learning curve, the x-axis is doubling
and incrementally taking less time per unit. For example, consider the graph below that
demonstrates the approximate average time needed to perform a given number of tasks.

Learning Curve, Average Time per Task.

How Can a Manufacturer Use Learning Curve Information?

The learning curve can play a fundamental part in understanding production costs and the
cost per unit. Consider a new hire who is placed on a manufacturing line. As the employee
becomes more proficient at their job, they will be able to manufacture more goods in a
shorter amount of time. Assume a 90% learning curve, which means there is a 10%
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improvement every time the number of repetitions doubles. A company can use this
information to plan financial forecasts, price goods, and anticipate whether it will meet
customer demand.
What Does a High Learning Curve Mean?
A high or steep learning curve indicates that it takes a substantial amount of resources to
perform an initial task. However, it also signifies that subsequent performance of the same
task will take less time due to the task being relatively easier to learn. A high learning curve
indicates to a business that something might require intensive training, but that an employee
will quickly become more proficient over time.
What Does a 90% Learning Curve Mean?
When a learning curve has a given percentage, this indicates the rate at which learning and
improvement occur. Most often, the percentage given is the amount of time it will take to
perform double the number of repetitions. In the example of a 90% learning curve, this means
there is a corresponding 10% improvement every time the number of repetitions doubles.
The Bottom Line
The time and resources spent to perform a task the first time are probably higher than the
time and resources spent on performing the same task for the 100th time. This idea of
continual improvement is measured through the learning curve.
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References
Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance.

Free Press.

Grant, R. M. (2016). Contemporary Strategy Analysis. Wiley.

Chopra, S., & Meindl, P. (2019). Supply Chain Management: Strategy, Planning, and

Operation (7th ed.). Pearson.

Heizer, J., Render, B., & Munson, C. (2020). Operations Management (13th ed.). Pearson.

Gaughan, P. A. (2017). Mergers, Acquisitions, and Corporate Restructurings (7th ed.). Wiley.

Sherman, A. J. (2010). Mergers and Acquisitions from A to Z. AMACOM.

Argote, L. (2013). Organizational Learning: Creating, Retaining and Transferring

Knowledge. Springer.

Boston Consulting Group (1970). Perspectives on Experience. BCG.