Vertical Integration Expands a Developing Business

Vertical Integration-

Vertical integration is the combination of two or more separate stages in the channel through ownership, including mergers or acquisitions. The expansion of a business by acquiring or developing businesses engaged in earlier or later stages of marketing a product.

In forward vertical integration , manufacturers might acquire or develop wholesaling and retailing activities.

In backward vertical integration , retailers might develop might their own wholesaling or manufacturing capabilities.

Advantages of vertical integration-

1 Cost reduction in terms of transportation can be done.

2 More co-ordination in terms of supply chain management is possible

3 Expansion could be possible in terms of core competitors.

4 Capturing the profit as well as maximising the profits both from upstream as well as from downstream.

5 More opportunity provision by differentiation through control over inputs.

Disadvantages of vertical integration-

1 Sometimes existing competencies should be sacrificed to develop new core competencies.

2 Building excess upstream capacity (more investment) so that down stream can have sufficient supply even under heavy demand.

3 If there is need for significant in-house requirements then it will reduce the ability to produce the product variety.

4 There will be lack of supplier competition which will lead to low efficiency resulting in potentially higher costs.

5 Even though vertical-related coordination may increase. But the flexibility may get reduced due to previous investments in both upstream as well as downstream.

Types of vertical integration-

FORWARD INTEGRATION-

A business model whereby a company takes d...

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...for you and this will allow you to employ their expertise rather than having to train new people to take over the work.

Disadvantages-

1 You will inherit all problems that run with the business. So if the previous owner had trouble attracting new customers, paying the lease, running new campaigns then you will have to deal with everything to set things right before you can even start to think about moving forward.

If the business has a history of disappointing the customers, you may also have a hard time convincing people that things will change under your direction.

2 The purchase will probably mean a large initial investment and usually much higher than it will require to start a business from scratch. Investment will also have to be in a lump sum, and you might not have the chance to go through the process in phases.

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