What is Vertical Integration?
It is a business strategy where the different aspects of making, selling, and delivering a product or service are managed by the same company.
Peeping into the reality of Vertical Integration
Vertical integration can be forward, backward and balanced.
Forward vertical integration
forward integration involves the establishment of subsidiaries to market or distribute the products to be used by the customers or themselves. A movie studio with a chain of theaters can be a good illustration.
Backward vertical integration
in backward integration, the company establishes the subsidiaries that influence directly or indirectly on the production of the product. For example, an automobile manufacturing company owns a tire manufacturing company. This strategy is intended to maintain a steady supply of inputs and to ensure the consistent quality of the end products.
Balanced vertical integration
this is what most companies do. Companies tend to establish subsidiaries that provide them the input as well as distribute their products. For example, if a restaurant chain produces agricultural products in its own farms and also owns a processing unit to process those agricultural products, the restaurant chain is said to be using the balanced vertical integration.
Advantages:
• Lower transaction cost
• High certainty of Quality
• Ability to monopolize the market
• Improve supply chain coordination
• Increase upstream and downstream profit margin
• Increase barriers to potential competitors
• reduced costs on transportation
• better profit margins
• Increased control over inputs
• Direct fulfillment of raw material from the source (a “middle man” isn’t needed)
• Understanding what the demand is versus the capacity available to fulfill the demand based on the manufacturing and distribution infrastructure
• Capable of selling off any excess quality material to other organizations in this industry
• Customer service benefits. by using vertical integration
• Able to provide a quality product that has a tight margin at a competitive price to the consumer without jeopardizing the product or service quality
• Knowledge of the product from origin to destination. This means that in order to ensure a long lasting product, the customer will be able to get history on the product (e.g. where it came from, where it was manufactured, how it made its way to the final stage, and which distribution facility fulfilled the delivery)
• Company can offer its customer a wide range of assortments of product due to the ability to handpick and select right from the source of the raw material
• Capable of handling any upside in demand. Co. is able to see what is in the pipeline and what is being exploited within the market
Disadvantages:
• reduced flexibility
• Decrease in supplier competition.
• increased bureaucratic costs
• Higher Monetary and Organizational Costs.
Conclusion:
All manufacturing companies are dependant on other companies for supplies as well as for the distribution of their products. Vertical integration reduces these dependencies and helps controlling the overall cost.
Vertical Integration
It is a business strategy where the same company owns all the different aspects of making, selling, and delivering a product or service.
It is the process in which a company is acquired by a company operating in same market , which is complementary to its existing business (as a supplier or user of product) but which operates in another market eg. a newspaper publishing company acquiring a paper manufacturer.
It is a business approach in which a company expands its operations to offer similar goods and services at a different point on the supply chain. For example, a widget wholesaler may expand into retailing widgets directly with consumers. More concretely, an oil exploration company may also begin refining oil in addition to its exploration operations. Vertical integration always occurs at different points on the supply chain: a retailer does not expand into retailing other products. Rather, it may move into wholesaling.
It is also called Merger of firms at different stages of production and/or distribution in the same industry. When a firm acquires its input supplier it is called backward integration, when it acquires firms in its output distribution chain it is called forward integration. For example, a vertically integrated oil firm may end up owning oilfields, refineries, tankers, trucks, and gas filling stations. It is also called vertical merger. This way the oil companies now own the vast majority of petrol stations.
In media it is the process by which a media company acquires another firm in the production process. . In entertainment, this can refer to owning production and broadcast companies.
A car company that expands into tire manufacturing would be an example of vertical integration. A company such as this is often referred to as vertically integrated.
In telecommunications, example of such integration is a telecom operator that is providing local access, long distance as well as international services.
In fishery individual companies have business interests in all areas of the fishery from harvesting, to processing, to marketing.
It controls over all aspects of the value chain, including product development, manufacturing, and distribution. For Maple Leaf, vertical integration refers to the alignment of its hog production, meat processing and rendering operations, allowing for greater operational efficiencies.
"Forward" integration refers to the production to distribution stages whereas "backward" integration refers to the production to raw material stages of the operations of a firm.
It is the business strategy that seeks to own and control all the activities including production, transportation, and marketing of a product. There are three types of vertical integration: backward vertical integration - a strategy when a company establishes subsidiaries to suply product inputs; forward vertical integration - a strategy that tries to take control of distribution and marketing of a product; and balanced vertical integration - a firm owns the subsidiaries that produce inputs and also distributes outputs. Vertical integration is one of the ways to solve a hold-up problem.
Vertical integration describes the ownership or control by a firm of different stages of the production process, e.g., petroleum refining firms owning "downstream" the terminal storage and retail gasoline distribution facilities and "upstream" the crude oil field wells and transportation pipelines.
Advantages:
Lower transaction cost:
High certainty of Quality
Ability to monopolise the market
Improve supply chain coordination.
Increase upstream and downstream profit margin.
Increase barriers to potential competitors.
reduced costs on transportation
better profit margins
increased control over inputs.
Direct fulfillment of raw material from the source (a “middle man” isn’t needed).
Understanding what the demand is versus the capacity available to fulfill the demand based on the manufacturing and distribution infrastructure.
Capable of selling off any excess quality material to other organizations in this industry.
Customer service benefits. by using vertical integration:
Able to provide a quality product that has a tight margin at a competitive price to the consumer without jeopardizing the product or service quality.
Knowledge of the product from origin to destination. This means that in order to ensure a long lasting product, the customer will be able to get history on the product (e.g. where it came from, where it was manufactured, how it made its way to the final stage, and which distribution facility fulfilled the delivery).
Company can offer its customer a wide range of assortments of product due to the ability to handpick and select right from the source of the raw material.
Capable of handling any upside in demand. Co. is able to see what is in the pipeline and what is being exploited within the market.
Disadvantages:
decreased flexibility.
decrease in supplier competition.
increased bureaucratic costs
Higher Monetory and Organisational Costs.
This can be brought about by a company having a big organisational structure which leads to higher cost for managing such a structure.
