Conceptual framework of strategies for vertical integration in agrarian sector of the economy

Figure 2. Conceptual scheme of the full-integration strategy

This strategy is used when there are contract difficulties, when enterprises believe they must protect non-patented proprietary processes, when companies desire to supervise all stages of quality control tightly, and when interconnections gives integration cost advantages.

Taper integration means that agro-integrated enterprises produce or distribute a portion of their requirements internally, but purchase or sell the remainder through specialized suppliers, distributors or competitors that are not so integrated to this alliance (fig. 3).

Tapered integration refers to a mix of vertical integration and market exchange. “Upstream”, a producer might manufacture some of the input itself and buy the remaining portion independent firms. “Downstream”, the manufacturer might sell a portion of its output through an in-house sales force and use independent sales forces to sell the remainder [4].

Figure 3. Conceptual scheme of the taper-integration strategy

Tapered integration creates bargaining power because enterprises can use information about suppliers' and/or distributors' cost structures to extract lower prices from them. This kind of integration is easier to manage by alliance than full-integration strategy and is used when farms' activity levels are large enough to justify one plant of efficient scale but not two plants of non-efficient scale.

Quasi-integration differs from full agro-integration in that the downstream enterprise still contracts with a supplier for the actual manufacture of the component, whereas with full vertical integration the production process itself is internalized [7]. Quasi-integrated enterprises need not own 100 percent of the adjacent business units in the vertical chain to enjoy the benefits of bonding their interests to other farms' interests. The bond between enterprises could take the form of cooperative ventures, minority equity agreements, loans or loan guarantees, repurchase credits, specialized logistical facilities or “understandings” concerning customary arrangements [5]. Downstream quasiintegration arrangements enable enterprises to retain a network of qualified distributors to maintain quality images. Upstream “take-or-pay contracts” and “kanban” arrangements enable enterprises to enjoy the advantages of vertical integration without assuming the risks of it.

The practice of quasi integration - whereby assemblers own the specialized and dedicated equipment (such as tooling) used by suppliers - appears to be explained, in part, by the desire of suppliers to avoid the possibility of opportunistic reconstructing by downstream customers. Accordingly, quasi integration can be viewed as an adaptive response to anticipated opportunistic behaviour. It may very often suffice to protect trading relationships where full-blown vertical integration might otherwise be necessary.

Non-integration is the strategies for attaining materials and markets with no internal transfers and no ownership are like contracts. They are especially attractive when enterprises are reluctant to buy specialized assets, need to lower breakeven points because of underdeveloped demand, or can arrange delivery schedules with suppliers (or distributors) as though they were extensions of the enterprise's assets. Enterprises risk the lowest proportion of their assets in vertical arrangements involving non-integrated controls [4]. Non-integration strategy generally is seen by us as the active choice of not engaging in integration. Non-integration can be an active and deliberate political choice of controlling, limiting and shaping the process of international industry consolidation. Non-integration does not refer to disintegration - to reverse the process of integration - nor is this occurring to any apparent extent.

Captive companies ' strategy means giving up independence in exchange for security of captive customer. The world practice indicates that captive companies' strategy of vertical integration in agrarian sector of the economy most efficiency to use for minimizing agricultural and market risks by the way of creation general insurance fund or establishing the strategic alliance of farms.

Generalization the routine of agro-business in Ukraine, world's experience for selection the most effective strategy of vertical integration in the agrarian sector of the economy made it possible to summarize the strategy framework for vertical integration (fig. 4).

Conclusions and suggestions

As a result of this research is generalized conceptual framework of strategies for vertical integration in agrarian sector of the economy, which includes thesaurus, classification of integration types and their strategies, suggestions for preconditions of integration strategy choosing. Tapered integration offers a safety valve in that both stages of the vertical chain need not be perfectly in balance. Farms, which are in strong market position, could use quasi-integration to control external enterprises' activities as if they were owned by company. A strategy of non-integration is for volatile competition conditions and stable high market power, requires little financial stake in adjacent branches of agro-industrial complex. As concerns captive companies' strategy, that it can uses when enterprises want to focus on target market or commodity by low processes relative market power. Such as alternative for integration are the effective forms of private-state partnership.

References

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