Vertical integration

What is vertical integration?

Vertical integration is a strategy that allows organisations to streamline operations. It involves taking direct ownership of stages of the production process, rather than relying on external suppliers. By using this method, organisations establish their own suppliers, manufacturers, distributors and more, rather than outsourcing them to a third-party, which involves a significant investment.

Pros and cons of vertical integration

Pros:

Quality control: Vertical integration means operations are all brought in house, so you’ll have more control over products and services when it comes to quality, meaning no more unhappy customers.

Streamlined: Moving everything in house, means removing extra processing steps, particularly when it comes to production and logistics. You won’t need to wait for the transportation of products, and you’ll have complete access to all information regarding the process which will optimise production.

Competitive advantage: Having improved efficiencies give you a competitive advantage, particularly when it comes to stability and speed of production.

Cons:

Investment: Vertical integration is costly, and you’ll need to invest in equipment, staff, larger premises and more.

Supply chain flexibility: The flexibility of your supply chain is reduced as you’ll no longer need to choose between suppliers, so you’ll need to invest.

Market volatility: If customer demand gets lower, it will have a greater impact on your organisation.

Vertical integration in the supply chain

Vertical integration involves an organisation taking control of steps in the supply chain, from producing finished products to distribution.

Backward integration: This process involves moving the control of products to a point earlier in the supply chain. Organisations must acquire raw materials in an attempt to streamline processes and move everything in house, which gives the organisation more control.

Forward integration: This type of integration is where the organisation gains control of the distribution process and finished products. It’s often much more difficult for organisations to do this type of integration as you’ll need to acquire suppliers that are further along in the supply chain.

Balanced integration: This approach is where an organisation merges both backward and forward integration to strike a balance. For example, sourcing raw materials as well as collaborating with retailers to deliver the finished goods.

 

What is the difference between vertical and horizontal integration?

Horizontal integration is where you acquire a competitor or similar business to expand the overall customer base and grow your market share. One of the benefits of this is that you will increase your market share, and therefore reduce competition and helps organisations to scale quickly. You also get the additional benefit of acquiring top talent from the competitors, which puts you at an advantage. However, you could face issues of merging the two company cultures which could result in failure.

Vertical integration is when an organisation gains better control and takes ownership of operations, rather than relying on external suppliers. It requires significant investment and has a lack of flexibility, particularly if customer demand decreases.

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