Vertical integration is a strategy businesses can use to help them achieve their goals (others can be viewed here). It involves buying other companies to increase sales, reduce costs or improve efficiency. The main aim of vertical integration is to create a more efficient supply chain by eliminating middlemen who add no value (such as wholesalers) and consolidating operations so that fewer resources are required from each one (like outsourcing). There are three types of vertical integration: forward vertical integration, backwards vertical integration, and balanced vertical integration.
What is Vertical Integration
Vertical integration is acquiring, establishing, and integrating companies involved in the same or related stages of the production process. A company may vertically integrate to reduce the number of suppliers needed to produce a product and increase its control over production activities. In addition, vertical integration can allow for economies of scale in manufacturing and distribution processes and efficiencies from sharing management expertise across businesses (e.g., marketing).
Vertical integration can be beneficial to businesses in many ways, including:
1. It can reduce costs. Integrating your business reduces the number of steps needed to get a product from conception to a finished product. This means fewer labor costs and fewer resources spent on transportation and logistics—and it also means that your customers will get their products faster.
2. It can improve customer service. When you’re vertically integrated, you can provide better service because there are fewer people between you and your customers.
3. It can help you innovate faster because you have access to more resources internally than if you were only buying from outside vendors
Forward vertical integration
Forward vertical integration is when a company buys a supplier. It’s a way to get control of the supply chain and reach into other markets, which can be good for both parties involved. If you’ve ever bought something from Amazon and saw it had been shipped by one of their warehouses, that was forward vertical integration at work.
Forward vertical integration also helps with market control because it allows you to dictate who gets your products. Without it, whoever decides to sell your product could set their price for them (and even if they didn’t set a price, they could still charge more than what you wanted). Forward vertical integration also gives companies more control over distribution channels. This means there’s no competition between retailers and sellers unless they want to break contact with each other, which isn’t likely since they would lose all that revenue from sales together!
Examples include:
- PepsiCo owns many beverage brands that are sold under various names: Gatorade and Aquafina
- Tropicana is owned by PepsiCo’s parent company Coca-Cola
- Lipton Iced Tea was spun off as a standalone brand after being acquired by Unilever in 2015
- Quaker Oats Company now produces Life Cereals under Kraft Heinz Co., which also owns Oscar Mayer meats and Capri Sun juice pouches
Backwards vertical integration
Backwards vertical integration is when a company buys out its supplier or distributor. For example, if Apple Inc. was to buy out a similar website, it could set its prices for all of its products and dictate terms such as when and how much money will be paid for each product sold on the site. In 2010 it also began buying back its stock from investors. This allowed them to control their stocks and prevent outside investors from interfering with their plans.
Backwards vertical integration is beneficial because it gives companies control over their supply chain and allows them to maintain quality control over their products. They retain control through better management of distributors or suppliers that aren’t directly related to production but still provide essential services during distribution (such as delivery).
Another example is Amazon; they use this method to control their supply chain, so they can set prices and dictate terms of contracts.
Balanced vertical integration
Balanced vertical integration is when a company owns its supply chain and customer relationship. In this type of vertical integration, the business is involved in all aspects of the supply chain and customer relationship.
An excellent example of balanced vertical integration is Amazon: The company owns warehouses where they stock their products; they also sell these products directly to customers through their website and apps. The business owns its suppliers, which means it buys supplies from them. It also sells to customers on its terms. When you buy something from Amazon Prime or subscribe to Amazon Music Unlimited, you buy directly from them instead of an external supplier.
In addition to owning their physical assets such as warehouses and trucks, companies must also invest time and money into building relationships with vendors who provide raw materials or services needed by their businesses. For example, accounting firms that help manage taxes or software developers who create security software for banks’ ATMs generate high-profit margins that justify going through all this trouble to grow revenue quickly without risking bankruptcy due solely to lack thereof!
Conclusion
Vertical integration is a very broad concept that can take many forms. Three types of vertical integration were discussed: forward, backwards, and balanced. Each type has its benefits and drawbacks, making them ideal for certain industries or situations but not others.
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