Junior and Senior level Ag Bus. Colorado Agribusiness Curriculum Section: Advanced Agribusiness Unit: Marketing Lesson Title: Vertical and Horizontal Integration Colorado Ag Education Standards and Competencies Colorado Model Content Standard(s): AGB11/12.04 - The student will understand the influences of agricultural economy and its influences on the overall economy. English Standard 1: Students read and understand a variety of materials English Standard 4: Students apply thinking skills to their reading, writing, speaking, listening, and viewing Student Learning Objectives: English Standard 5: Students read to locate, select, and make use of relevant information from a variety of media, reference, and technological sources. The student will be able to : 1. Define horizontal integration. 2. List and explain the advantages and disadvantages of horizontal integration. 3. Define vertical integration. 4. Explain the three types of vertical integration. 5. List and explain the advantages and disadvantages of Vertical integration. Time: 50 minute period Resource(s): Instructions, Tools, Equipment, and Supplies: Strategies for Great Teaching, by Mark Reardon and Seth Derner, ISBN 1-56976178-7 Farm and Ranch Business Management, by Deere Company, ISBN 0-86691-135-9 http://en.wikipedia.org/wiki/Forward_price www.quickmba.com/strategy Lesson Plan Computer LCD projector or copies of PowerPoint Loaf of Bread Copies of quiz A copy of the key. Unit 5, Lesson 4: Vertical & Horizontal Integration 1 Interest Approach: Objective 1: Objective 2: Objective 3: Slide 1 Slide 2 Have a loaf or slice of bread sitting in front of the class. Ask students how that loaf or slice got there? Direct them to ideas of that you bought it or made it and that it can from wheat. Now have students follow a kernel of wheat from the field to their bread at home. The wheat is grown by the farmer and then harvested and transported to an elevator where it is sold and transported to a mill where it is made into flour and then the flour is sold and taken to a bakery where they mix it with other ingredients to make the bread in front of you. What are some ways that a farmer could make a better profit from his wheat if he knew all the steps it takes to get his wheat from the farm to the bread we eat? What could he do with this information? Today we are going to explore two ways that this wheat farmer could expand his business and make more money. Define horizontal integration. Slide 3 Horizontal integration is the addition of other business activities at the same level of the value chain For example: The Standard Oil Company buying 40 refineries An automobile manufacturer buying a sport utility vehicle manufacturer A radio station that also owns a newspaper and magazine A angus cow calf producer that buys a corn field Advantages of Horizontal Integration: Slide 4 Economics of scale: Selling more of the same product in different parts of the world Economics of Scope: Sharing resources common to different products. “Synergies” Increased Market Power Reduction in cost Slide 5 Disadvantages: Costs Increased work load Increased Responsibilities Anti-trust issues Creating a monopoly Define Vertical Integration. Slide 6 Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers. Example: Objective 4: Carnegie Steel Company owned mills where the steel was manufactured, mines where the iron ore was extracted, coal mines that supplied the coal, ships and railroads that transported the material, etc. Three types of Vertical integration Slide 7 Unit 5, Lesson 4: Vertical & Horizontal Integration 2 Objective 5: Backward (upstream) vertical integration: this is when a company owns some of the subsidiaries that produce some of the inputs used in the production of its products. o Example: When and automobile company owns a tire company Forward vertical integration: this is when a company owns the subsidiaries that market the product. o Example is an movie studio that also owns a chain of theaters Balanced Vertical Integration: is a company that sets up subsidiaries that supply them with inputs as well as market their product. Advantages of vertical integration: Slide 8 Reduce transportation cost. Improve supply chain coordination. More opportunities to differentiate by means of increased control of inputs. Capture upstream and downstream profits. Increase entry barriers to potential competitors. Slide 9 Disadvantages of Vertical Integration Capacity balancing: Making sure that inputs will match outputs at all levels. Potentially higher cost due to the lack of supplier computation. Decreased Flexibility. Developing new competencies may compromise existing competencies. Increase bureaucratic costs. Monopolization of markets. Now we are going to do an eye witness moment. In 30 seconds find someone who’s birthday is the closest to yours and determine who is going to be the reporter and who is the interviewer. Begin! Time! In the next 1 minute and a half you need to COMPARE vertical integration and horizontal integration. Begin! Review/Summary: Application-Extended Classroom Activity: Application--FFA Activity: Time! Now let’s switch reporters and interviewers in your groups. Now you will have 1 minute and a half to CONTRAST vertical and horizontal integration. Begin! Use the quiz slides on the power point for the review slide 10 Now remember the loaf or slice of bread that we started with today how could that wheat farmer horizontally integrate? How could he Vertically integrate? What might be stopping him or holding him back? You might want to share the bread with your students at this time. Have students bring in examples of companies that have or are integrating either vertically, horizontally, or both. Ag Business Management Unit 5, Lesson 4: Vertical & Horizontal Integration 3 Commodity Marketing Challenge Application--SAE Activity: Evaluation: Evaluation Answer Key: Have students think of ways that they could vertically or horizontally integrate their SAE See attached Quiz See attached answer sheet. Unit 5, Lesson 4: Vertical & Horizontal Integration 4 Quiz Name___________________________________________ Date__________________ Read each of the questions carefully and answer each question with complete sentences. Make sure that you answer the whole question. You may use a separate piece of paper for the last question on this quiz. GOOD LUCK! 1. What is horizontal integration? 2. What is vertical integration? 3. What are the three types of vertical integration? Briefly describe each. 4. Compare and contrast vertical and horizontal integration. Unit 5, Lesson 4: Vertical & Horizontal Integration 5 Quiz Name__KEY______________________________________ Date__________________ Read each of the questions carefully and answer each question with complete sentences. Make sure that you answer the whole question. You may use a separate piece of paper for the last question on this quiz. GOOD LUCK! 5. What is horizontal integration? Horizontal integration is the addition of other business activities at the same level of the value chain 6. What is vertical integration? Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers 7. What are the three types of vertical integration? Briefly describe each. a. Backward (upstream) vertical integration: this is when a company owns some of the subsidiaries that produce some of the inputs used in the production of its products. i. Eample: When and automobile company owns a tire company b. Forward vertical integration: this is when a company owns the subsidiaries that market the product. i. Example is an movie studio that also owns a chain of theaters c. Balanced Vertical Integration: is a company that sets up subsidiaries that supply them with inputs as well as market their product 8. Compare and contrast vertical and horizontal integration. Student’s answers will vary Unit 5, Lesson 4: Vertical & Horizontal Integration 6