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8 Advantages and Disadvantages of Vertical Integration

navajocodetalkersadmin on July 1, 2015 - 5:59 pm in Pros and Cons

Vertical integration is a form of business expansion that encompasses all of the different steps in the business. This means the same company owns the retail portion of the business, as well as the production and distribution portion. They own all of the pieces of their businesses that it takes to run, cutting out all of the middle men. This is a very prestigious way for a business to grow because it benefits everyone that is involved. While vertical integration is a goal for many different companies, there are some certain problems with vertical integration as well.

Advantages of Vertical Integration

1. Lower Prices All Around
One of the most beneficial things about vertical integration is that it gives the company the ability to greatly lower it’s prices. They are no longer buying supplies or production resources from people who are also trying to make a profit, so they can focus solely on their product and their customers.

2. Complete and Total Control
Vertical integration gives a company one hundred percent control of all aspects of their business. They have the ability to dictate exactly the quality and types of materials that they want to be used, how they want them to be produced, and how much they are sold for. This type of control helps them to ensure the image and success of their company on a very intense level.

3. Can Re-Create Products
Products that are very popular or trendy can be simply re created by a company with vertical integration. This can lower the prices for things that consumers wants, as well as allow the company to be much more competitive with other brands.

4. Internal Job Creation
A company that integrates vertically creates many new jobs for people within their company. They have to hire people to run and work in the distribution centers, supply centers, and production lines. This boosts the strength and size of the company as a whole.

Disadvantages of Vertical Integration

1. Flexibility Is Hindered
One of the biggest issues with vertical integration is the simple fact that company will have extreme difficulty adapting to new things. Instead of simply being able to order a new type of product, they must design it, as well as spend the time and money learning how to produce it themselves. They are limited to what they can sell.

2. It Takes A Whole Bunch Of Money
In order to integrate vertically, a company must have a very extreme amount of capital to invest. They have to purchase factories, hire mass amounts of new people, and control all of their new facilities. This makes vertical integration nearly impossible for smaller companies.

3. A Loss of Focus
Most companies have a general goal and focus for their long term future. When you start to incorporate large scale production processes, things will change. The focus shifts from the customer experience, to running the distribution facilities. It is extremely difficult to balance all things in the same way you did before vertically integrating.

4. It’s A Whole Lot Harder
Running the retail front of a business is one thing, and even that is not simple at all. However, when you jump head first into things like production, you have to learn to run an entirely new sector of the business world. This can be a lot to handle, and become the bane and detriment of the company.

Important Facts About Vertical Integration

  • If a company moves down the supply chain it is referred to as forward integration, if they begin to move up the supply chain it is called backward integration.
  • Richard Branson is one of the most renowned expert on vertical integration.
  • The pork and pig market is one of the markets that has experienced the biggest boom in vertically integrated companies.
  • Some companies that have successfully vertically integrated are Apple, Alibaba, Walmart, and Exxon Mobil.
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