How does vertical integration help businesses?
Vertical integration on the other hand is a business strategy where a firm takes full control of its supply chain by owning or otherwise controlling its suppliers, distributors/retail outlets. There are several major ways that adopting a vertical integration strategy can potentially help a business:
- Better Supply Chain Control and Operations
Vertical integration helps to sort out the flow of goods and services in supply chains because companies are directly connected with each other. For instance, an auto manufacturer which has a direct controlling stake in a steel manufacturing firm can regulate the manufacturing of steel to meet its exact production requirements of automobiles. This enhances planning and may reduce wastage and accumulation of stocks which are not necessarily required.
- Increased Profit Margins
The gist of the value chain is that the more of it a company owns, the lower its costs and higher its profit margins. They can remove middlemen and hence the associated markups of their products where they have direct control over the production and distribution of their products. Some of the benefits include lower costs and competitive pricing that can be reflected to the consumer.
- More Control over Quality
There is increased control in product quality when firms have vertical control over production and distribution. For instance, an electronics firm that directly controls component manufacturing can put in place high standards of quality assurance. This assists in checking on the quality of the products in the market, and also try to minimize on the number of defective products.
- Improved Innovative Capabilities
It can be argued that vertical integration enhances internal innovative capacities through enhanced coordination between R&D, product development, and manufacturing departments. New products can take less time to get to the market when the groups are involved in the value chain with ownership.
- Less dependency on supply and distribution partners
More ownership of the value chain is advantageous since it avoids use of unreliable suppliers and distributors. It offers protection against supply shocks or changes in distribution partners or strategies.
In conclusion, vertical integration is pivotal in increasing organizational supply chain efficiency, cost, quality, innovation, and supply assurance. There are also some disadvantages which are seen in form of downside risks such as fixed costs and flexibility. What it means is that companies have to weigh the advantages and the disadvantages based on their products, services or markets.