Vertical integration is basically an arrangement or system in micromanagement where a company controls two or more areas of the supply chain. In this set-up, the company can merge with another company at different stages of production to eliminate the need for a middleman and eventually lessen production costs. Some experts say that this is an important strategy while other oppose and regard it as a risky one. To better understand the issue, let us look at some of the arguments posit by supporters and critics.
List of Pros of Vertical Integration
1. Consumer Benefits
Advocates for vertical integration claim that since the company or manufacturer can also be the retailer which can also lower production costs. Consequently, goods and services sold to consumers can be offered for lower prices.
2. Competitive Advantage
Companies that engage in vertical integration have leverage over their competitors since they have the power to control the market and leave their competitors behind. They have the capacity to purchase other companies and have access to patents and resource.
3. Investment Opportunities
This strategy also allows a company to specialize on the different aspects of the industry, from manufacturing to retailing. This way, a business can invest and develop their own products instead of buying them from other manufacturers. In the end, profits increase.
4. Employee Growth
A large company employs many members of the team and with vertical integration, employment opportunities will be offered. As for the members within the company, they will be given the chance to get promoted or try working in other departments. This can help nurture their skills, knowledge and experience.
List of Cons of Vertical Integration
1. Risky and Expensive
One of the setbacks of this type of arrangement is the money and risks involved. Investments for infrastructure and production entail money and if consumers lose their interest in the products or services offered by a company, business fails.
2. Decreased Flexibility
Since capital will be used in different parts of the supply chain, there will be limited resources to be distributed equally, say, in manufacturing and distribution. If an opportunity presents itself, there might not be sufficient capital to grab the chance.
Vertical integration in companies calls for being on top of the different aspects of the industry such as manufacturing and sales. This can result to misunderstanding since one supply chain might be given more attention than the other. Consequently, production or sales will be affected.
4. Requires Skills
Being at the helm of a business, by itself, is already challenging. How much more if there are numerous businesses to oversee? Skills and knowledge are important which can prove to be difficult. This is why the risks are there and the possibility that this will fail.
Although there are benefits to this type of strategy, there are also risks involved. It is best for companies to research and study if this arrangement will be good for the industries they belong to.
Crystal Lombardo is a contributing editor for Vision Launch. Crystal is a seasoned writer and researcher with over 10 years of experience. She has been an editor of three popular blogs that each have had over 500,000 monthly readers.