Vertical integration:advantages and disadvantages of a business technique

//Vertical integration:advantages and disadvantages of a business technique

Vertical integration:advantages and disadvantages of a business technique

Over the last years, due to the development and complexity of technologies regarding supply chain management, many Companies are continuing to gain closer relationship with other parties operating at different levels of this sector, on the purpose of improving profitability and competitiveness of their business through cutting off costs.

This phenomenon, which is defined as “vertical integration”, i.e. the combination, under a single ownership, of two or more stages of production or distribution (or both) that are usually separated, entails one Company exercising control over several or all integrated levels of supply chain, such as research and development, production, pricing policy, packaging, marketing and distribution, hence over all the levels from the factory through to retail outlets.

Before applying this business strategy to your organisation, however, it is important you are aware of the advantages and disadvantages connected with it, as whilst some authors allege that adequate vertical integration can be crucial for a Company to survival, others blame excessive integration for causing corporate failure.

Advantages

Besides the vertical integration can be used to obtain bigger control over the operations, to enhance the profits, to improve marketing and to envisage costs, it surely affords the following advantages.

  • Advantages over other competitors

The Company will be able to attain important advantages over their competitors by blocking them from gaining access to relevant markets and sources and by being able to purchase specialised assets. By following this way, the Company will be able to have the only access to a limited resource, so distinguish itself from its competitors.

  • Cost saving

By getting into a vertical integration, Companies are able to eliminate the duplicate sources of overheads by bypassing various steps in production and distribution and by consolidating management. A company that is vertically integrated has lower costs. As a consequence, the consumers will benefit from it by purchasing the products at a lower price.

  • Quality of products

By getting into a vertical integration, the company is able to offer products of hight standard, as the other party operating at the level of the production will own a high quality control system.

Disadvantages

Lack of expertise and knowledge at a specific level in the supply chain associated with the need to eliminate the overheads with the control of different levels in the integrated chain may mean that the disadvantages of a vertical integration might surpass the benefits thereof. For this reason it is important to analyse thoroughly the disadvantages which might arise out.

  • Capital requirement

The Companies interested in applying a vertical integration strategy to they business need to have a huge amount of capital to invest, i.e. the amount of capital that the newly integrated operations require.

  • Risks and outlays

By getting into a vertical integration, the Company will not be able to share risks and outlays with a third party.

  • Flexibility decreased

Vertically integrated companies are not able to follow the consumers trends, as they need to focus on their established strategy regardless of other factors. Moreover, those companies have been previously involved in upstream or downstream investments, so that their flexibility will likely result as decreased.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Feel free to contact us.

Davide Palazzo – commercial lawyer at Palazzo Law Boutique – www.palazzolawboutique.com.

By | 2017-09-08T12:31:40+00:00 July 2nd, 2015|Uncategorized|0 Comments

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