8 Advantages and Disadvantages of Vertical Integration

The nature of vertical integration refers to the merger between two businesses or organizations at different levels of production. It is intended to increase the efficiency and reduce costs in all of the supply chain. In this manner, it will improve the competitiveness and profitability of the business.

Due to the development and sophistication of technologies regarding supply chain management, many companies continue to obtain close relations with other channel members. Through vertical integration, companies are allowed to get unparalleled influence over them.

For those who have a business and want to try this good business technique, perhaps it is important to know the advantages and disadvantages of this type of system first.

List Of Advantages Of Vertical Integration

Here are a few thoughts that you need to ponder if you are looking to employ vertical integration in your system.

1. Investment in specialized assets.
Getting advantage over the competition is what businesses are always aiming to do. By applying this system to your organization, it is possible to develop and invest in products that you offer. It will allow you to increase share in the market that would lead to increase your business profits.

2. Lower transaction costs.
There is low cost of transaction because of the transactions done between subsidiary companies with central management and central communication systems. This will be possible if their system is somewhat inexpensive to use.

3. Certainty with quality.
Due to the quality control system of the subsidiary company, it will be possible to have products of high standards. Acquiring this strategy will allow each product to go be produced with strict compliance of their quality standards.

4. Advantage over competitors.
This option will increase the barriers for potential competitors to enter. This is so because the company or firm can gain the only access to a limited resource.

List Of Disadvantages Of Vertical Integration

Here are a few thoughts with reference to the significance of vertical integration to be implemented in your company.

1. Balancing problems.
Take for instance, a business requires the establishment of extreme upstream capacity for the assurance of having enough supply from downstream operations under any condition. The previous suppliers of the business may think of retaliating which can potentially endanger the production.

2. Flexibility decreased.
Businesses that are previously involved with upstream or downstream investments will more likely result to the decrease in its flexibility. However, it will increase the flexibility in the coordination of vertically-related activities.

3. Market entry barriers.
Market entry barriers are often the case when manufacturers control the access to raw materials or crucial components with scarce origin. Through vertical integration, they are able to limit the competition and possibly establish strong market position and allow protection of the business’ consumer base. Nevertheless, this could lead to anti-trust when regulators think that mergers alter market concentration.

4. Inability to increase product variety.
If significant development within the company is needed, it will decrease the organization’s ability to increase its product variety.

Final Thoughts

Weighing the options before employing vertical integration in your company is always necessary. This will help you decide its suitability for your own business. Remember that the success of the business depends on your ability to make the right decision.