Agribusiness Management and Trade

Lesson-33 Market Integration and Marketing Efficiency

33.2  MARKET INTEGRATION

Kohis and Uhl have defined “Market integration as process which refers to the expansion of firms by consolidating additional marketing functions and activities under a single management”.

Types of market integration:

There are mainly three types of integration viz, horizontal integration, vertical integration and conglomeration which are discussed below.

1. Horizontal integration:

• When a firm gains control over other firms, performing similar marketing functions. Some marketing agencies (say, sellers) combine to form a union with a view to reducing their effective number and the extent of competition in the market.

• Horizontal integration is advantageous for the members who join the group.

• If farmers join hands and form cooperatives, they are able to sell their produce in bulk and reduce their cost of marketing.

The purpose of horizontal integration is to

• Grow the company in size,

• Increase product differentiation,

• Achieve economies of scale,

• Reduce competition or access new markets.

When many firms pursue this strategy in the same industry, it leads to industry consolidation (oligopoly or even monopoly).

2. Vertical integration:

Vertical integration occurs when a single firm can produce complementary products and services more profitably than a number of firms. Activities are complementary when carrying out one activity reduces the cost of doing the other. Put somewhat differently, vertical integration refers to the common organization of an industry across a number of components of the value chain and to increased standardization of production at each stage of the production process. Maturing firms in a vertically integrated industry are likely under certain conditions to try to control more parts of the production process. There are three levels of integration. These are:

• Non-integrated - firms tend to act as individual business units. Non-integrated industries are likely to be found in developing countries. A small subsistence farm producing food only for the needs of the farm household would be an example of a non-integrated firm.

• Semi-integrated - involves the processor taking over some parts of the production process to control the quality and quantity of output. In the broiler industry, the firm rearing the poultry may be involved in the production of parent stock or in running the hatchery operation.

• Integrated - large corporate entities control all levels of the value chain from feed milling to delivery at the retail level. Firms involved in pig meat production might own the feed mills used to manufacture the animal feed; they might also be involved in the breeding of pigs for the fattening operation; these firms might also own the slaughtering facilities and retail outlets to sell the product.

There are two types of vertical integration

• Forward integration: Eg: Wholesaler assuming the function of retailing i.e. assuming another function.

• Backward Integration: Eg: Processing firm assumes the function of assembling / purchasing the produce from villages.

Examples of vertical integration:

• Suguna Group, India’s largest poultry enterprise, launched its outlet of a chain of quality chicken retail stores under the brand name Suguna Daily Fressh.

• VKS FARMS PVT LTD, the company owns a full value chain that starts from parent breeders, hatcheries, and commercial broiler farms, feed mills, chicken processing plant and retail chain outlets

• VENKY'S (INDIA) LIMITED, Venky's (India) Limited sells its processed and further processed chicken under the brand name Venky's. It is a preferred supplier to the Indian outlets of McDonalds, KFC, Pizza Hut, and Domino's

• Partnership between Monsanto and Cargill, “which controls seeds, fertilizers, pesticides, farm finance, grain collection, grain processing, livestock feed processing, livestock production, and slaughtering, as well as some well-known food brands.

Purpose for vertical integration

• Reduction of transaction costs

• Reduction in completion

• Market ownership and margin control

3. Conglomeration:

A combination of agencies or activities not directly related to each other, may when it operates under a united management, be termed a conglomeration.

Eg: Hindustan Lever Ltd. Delhi cloth and General mill (cloth & vanaspati).

33.3   MARKETING EFFICIENCY

Marketing efficiency is essentially the degree of market performance. It is a broad and dynamic concept.

Definition: It is the ratio of market output (satisfaction) to marketing input (cost of resources). An increase in ratio represents improved efficiency and vice versa.

Components of marketing efficiency

1. Effectiveness with which a marketing service is performed.

2. The cost at which the service is provided.

3. The effect of this cost and the method of performing the service as production and consumption. i.e. effect of (1) & (2), last two are more important.

Assessment of marketing efficiency:

1. Technical or Physical or Operational efficiency: It pertains to the cost of performing a function; Efficiency is increased when the cost of performing a function per unit of out put is reduced.

Eg: - Storage processing, handling etc.

2. Pricing / Allocative efficiency : System is able to allocate farm products either over time, across the space or among the traders, processors and consumers at a point of time in such as way that no other allocation would make producers and consumers better off. This is achieved via pricing the product at different stages, places, times, among different users. Pricing efficiency refers to the structural characteristics of the marketing system, when the sellers are able to get the true value of their produce and the consumers receive true worth of their money.

The above two types are mutually reinforcing in the long run.

Empirical Assessment of Marketing Efficiency:

A reduction in the cost for the same level of satisfaction or an increase in the satisfaction at a given cost results in the improvement in efficiency. (Khols and Uhl.)

         O

E  = ---- 100

                    I

E = level of efficiency

O = value added to the marketing system.

I = real cost of marketing

Shepherd „s formula of marketing efficiency :

           V

ME = --- - 1 100

           I

ME = Index of marketing efficiency

V = Value of the goods sold or price paid by the consumer (Retail price)

I = Total marketing cost or input of marketing.

This method eliminates the problem of measurement of value added.