Last updated on Sep 22, 2023
Powered by AI and the LinkedIn community
1
What experts are saying
2
Benefits of vertical integration
3
Drawbacks of vertical integration
4
Types of vertical integration
5
Factors to consider before vertical integration
Vertical integration is a growth strategy that involves acquiring or merging with other businesses along the same supply chain. For example, a car manufacturer might buy a steel producer or a retailer might own a distribution center. This can give a company more control over its inputs, outputs, and processes, as well as reduce costs and increase efficiency. However, vertical integration also comes with some challenges and opportunities that need to be carefully considered. In this article, we will explore some of the pros and cons of this strategy and how to implement it successfully.
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1 What experts are saying
LinkedIn members share key insights and examples from their own experience to help answer this question for you.
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Anna Andrew Temu
Chair and Founder of Sokoine University Graduate Entrepreneurs Cooperative (SUGECO)
I am thinking how vertical integration can be achieved in agricultural value chains in the developing countries. Can cross integration of 2 or 3 value chains be considered beneficial in food industries were a by product from one is passed on to another value chain in integrated manner e.g. sunflower cake from sunflower processing into poultry industry own by the same company?
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2 Benefits of vertical integration
One of the main benefits of vertical integration is that it can help a company gain a competitive advantage in the market. By owning more stages of the supply chain, a company can reduce its dependence on external suppliers, customers, or intermediaries, and avoid potential disruptions, delays, or price fluctuations. This can also improve the quality and consistency of the products or services, as well as enhance the customer experience and loyalty. Additionally, vertical integration can create synergies and economies of scale, as the company can leverage its resources, capabilities, and expertise across different functions and operations.
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Tahmina Day, MBA, CERP
Head of ESG | Risk Strategist | Sustainability Visionary | Board Member | Speaker
Vertical integration can also provide a competitive advantage by creating barriers to entry and increasing market power. Additionally, vertical integration promotes innovation, flexibility, and strategic alignment across the supply chain, leading to long-term growth and profitability.
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Ameya Agrawal
IIM Kozhikode | National Award by Gov. of India | Ex-Accenture
Vertical integration can also help to reduce risk in case of unforeseen circ*mstances or a surge in demand on the supplier side. It also helps with quality control, thus helping control customer satisfaction. All these factors combined help in improved efficiency.
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3 Drawbacks of vertical integration
However, vertical integration is not without its drawbacks. One of the main challenges of this strategy is that it can increase the complexity and risk of the business. By expanding into new areas, a company might face higher capital and operational costs, as well as regulatory and legal issues. Moreover, vertical integration can limit the flexibility and innovation of the company, as it might become too focused on its own activities and miss out on external opportunities or partnerships. Furthermore, vertical integration can create conflicts of interest or inefficiencies within the organization, as different units might have different goals, incentives, or cultures.
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Tahmina Day, MBA, CERP
Head of ESG | Risk Strategist | Sustainability Visionary | Board Member | Speaker
Vertical integration has drawbacks, including increased capital requirements, reduced flexibility, and higher operating costs. Managing a vertically integrated business can be complex, and the lack of specialized knowledge in each stage of the supply chain may lead to inefficiencies. Additionally, there can be antitrust concerns and risks of concentrating too much risk within the company. For instance, a tech company that decides to vertically integrate by acquiring a semiconductor manufacturer may face challenges in managing the new business and higher capital expenses, especially if the technology landscape rapidly changes, and it loses focus on its core competencies in software development.
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4 Types of vertical integration
There are two main types of vertical integration: backward and forward. Backward integration refers to acquiring or merging with businesses that supply the inputs or raw materials for the company's products or services. For example, a coffee shop might buy a coffee plantation or a roaster. Forward integration refers to acquiring or merging with businesses that distribute or sell the company's products or services. For example, a publisher might own a bookstore or a website. Both types of vertical integration can help a company secure its supply chain and increase its market power, but they also require different levels of investment, expertise, and coordination.
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Tahmina Day, MBA, CERP
Head of ESG | Risk Strategist | Sustainability Visionary | Board Member | Speaker
A conventional MBA-style approach breaks down vertical integration to four major types: backward, where a company integrates with its suppliers, forward, where it integrates with distributors or retailers, balanced, which involves both backward and forward integration, and partial, where it integrates with only some stages of the supply chain. Each type offers unique advantages and challenges, and the choice depends on the company's industry, objectives, and resources. One of the most famous examples of vertical integration is seen in the early days of Ford, where Henry Ford owned timber forests, iron mines, and rubber plantations, allowing him to control the supply of raw materials for his vehicle.
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5 Factors to consider before vertical integration
Before deciding to pursue a vertical integration strategy, a company should consider several factors, such as the industry structure and dynamics, the company's core competencies and resources, and the potential benefits and costs. For instance, the industry could be fragmented or consolidated, growing or declining, and stable or volatile. Additionally, the company should assess its strengths and weaknesses, unique capabilities and assets, and its ability to manage and integrate different functions and operations. Furthermore, the company should consider the value it can create or capture by owning more stages of the supply chain, the risk and uncertainty it can tolerate or mitigate, and the capital and time it can invest or allocate.
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