Advantages And Disadvantages Of Vertical Integration
Vertical integration happens when two organizations or businesses at various stages of production merge. The main goal of vertical integration is actually to increase the overall efficiency and to reduce costs all throughout the supply chain, thus improving business competitiveness and profitability. Because of the increasing developments and sophistication of technology when it comes to the supply chain management systems, a lot of companies are continuing to obtain a closer relationship with some other channel members.
Vertical integration also enables such companies to obtain unparalleled amount of influence over them. If you have a business and you are thinking about employing it in your organization and if you are thinking that is a good business strategy, it is imperative to know first the advantages and disadvantages of vertical integration.
The Advantages of Vertical Integration
Here are some of the most valuable things that you can consider about vertical integration.
1. It enables you to invest in greatly specialized assets.
This is a great advantage that you could obtain over your competitors. Through this, it is possible for you to invest and develop the products that you are offering. With highly specialized assets, you can now differentiate your business from your competitors, allowing you to gain highly competitive advantage. Through this, you can increase your share within the market, leading to increased business profits.
2. Lower Costs of Transaction.
This actually comes because of the inter transactions that happen between the subsidiary companies that typically have a central management and the central communication system that is inexpensive to use.
3. High certainty when it comes to quality.
Since the subsidiary company has a quality control system, then there is more likelihood for them to produce high standard products.
Disadvantages of Vertical Integration
Before you consider this as a great strategy for your business, you need first to determine its disadvantages.
1. Capacity Balancing Problems.
For instance, the business may need to establish excess upstream capacity in order to ensure that the downstream operations will have enough supply under any demand conditions. This might even lead to retaliation from the business’ previous suppliers that can potentially endanger the primary production.
2. Decreased Flexibility.
This is because of the downstream or upstream investments that the business will make.
3. Can Create Some Barriers to Market Entry.
Those manufacturers that actually control access to crucial components or the raw materials that are scarce through vertical integration can always create some barriers to market entry. By limiting the competition, it is possible for them to establish a strong position in the market and protect the customer base of the business. However, an organization may experience anti-trust regulators once the regulators think that the merger alters the market concentration.
Do you think that vertical integration is one of the best strategies to be employed in your business? You need first to weigh your options and think of these advantages and disadvantages of vertical integration to help you decide if this is suitable for your business. Making the right decision is crucial towards the success of your business.