Short Note on Vertical Integration

Vertical integration represents a style of management control. In other words, vertical integration means the degree to which a company owns its suppliers and buyers. From an external point of view, a company is usually positioned within a supply chain, or value network.

Form an internal point of view, the vertical integration represents those parts of the value network which belong to the organization, based on the policy areas of direction, extent, and balance. An increased vertical integration can therefore take two directions, either towards the customers, i.e. downstream, or towards the suppliers, i.e. upstream. Two points that might be of interest when deciding whether to vertically integrate is cost and control.

There are three types of vertical integration: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (both upstream and downstream) vertical integration.

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Benefits of Vertical Integration

  • One of the biggest benefits of vertical integration is that it often creates economies of scale.
  • Reduced transaction costs
  • Strengthen supply chain co-ordination.
  • Vertically integrated companies also gain cost efficiencies by managing quality at every step.
  • Strategic independence.
  • Superior opportunities for investment growth as a result of decreased uncertainty.
  • Get access to downstream distribution channels which usually would be unavailable.
  • Vertical integration can in the long run create barriers to entry for rivals. This is the reason why some companies may possibly control so much of the market or supply of raw materials that vertical integration can easily raise antitrust issues.

Drawbacks of Vertical Integration

1. Greater coordination costs.

2. Higher monetary and business costs of moving over to other suppliers/buyers.

3. Reduced flexibility as a result of previous upstream or downstream investments.

4. Lower motivation for good performance.

5. Monopolization of markets

6. Reduced capability to increase product variety

7. Capacity balancing issues.

Q. Write a short note on vertical integration.

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