Vertical integration is a strategy that businesses can use to help them achieve their goals (see others here) It involves buying other companies to increase sales, reduce costs or improve efficiency. The main goal of vertical integration is to create a more efficient supply chain with intermediaries (such as wholesalers) adding no value and combining activities that require fewer resources from each (such as outsourcing). There are three types of vertical integration: forward vertical integration, backward vertical integration, and balanced vertical integration.
What is vertical integration
Vertical integration is the acquisition, establishment and merger of companies involved in the same or related stages of the production process. A company can vertically integrate to reduce the number of suppliers needed to produce a product and to increase its control over the production process. In addition, vertical integration can allow for economies of scale in production and distribution processes and the sharing of management skills across businesses (eg, 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 required to get a product from concept to a finished product. This means lower labor costs and fewer resources spent on transportation and logistics—and it means your customers get their products faster.
2. It can improve customer service. When you are 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 just buy from outside vendors.
Forward vertical integration
Forward vertical integration is when a company buys a supplier. It’s a way to control the supply chain and reach other markets, which can be good for both parties involved. If you’ve ever bought something from Amazon and seen it shipped by one of their warehouses, that was vertical integration at work.
Forward vertical integration helps control the market because it allows you to dictate who gets your products. Without it, anyone who decides to sell your products can set their price for them (and even if they don’t set a price, they can still charge more than you wanted). Forward vertical integration gives companies more control over distribution channels. This means that there is no competition between retailers and sellers unless they want to cut off contact with each other, which is unlikely because they would lose all revenue from sales together!
- PepsiCo owns several beverage brands sold under different names: Gatorade and Aquafina
- Tropicana is owned by Coca-Cola, the parent company of PepsiCo
- Lipton Iced Tea was discontinued as a standalone brand after being acquired by Unilever in 2015.
- Quaker Oats Company now produces Life Cereal under Kraft Heinz Co., which owns Oscar Mayer meat and Capri Sun juice pouches.
Vertical integration behind
Backward vertical integration is when a company buys its supplier or distributor. For example, if Apple Inc. A similar website wants to buy, but it can set its prices for all its products and decide when and how much to pay for each product sold on the site. In 2010 it began buying back its stock from investors. This prevents them from controlling their stock and outside investors interfering with their plans.
Backward vertical integration is beneficial because it gives companies control over their supply chain and allows them to maintain quality control of their products. They maintain control through better management of distributors or suppliers that are not directly related to production but still provide essential services during distribution (such as delivery).
Another example Amazon is; They use this method to control their supply chain, so they can set prices and dictate contract terms.
Balanced vertical integration
Balanced vertical integration is when a company owns its supply chain and customer relationships. In this type of vertical integration, the business is involved in all aspects of the supply chain and customer relationships.
An excellent example of balanced vertical integration is Amazon: the company owns the warehouses where they stock their products; They sell these products directly to consumers through their website and app. The business owns its suppliers, meaning it buys supplies from them. It sells to customers on its terms. When you buy something from Amazon Prime or subscribe to Amazon Music Unlimited, you’re buying directly from them instead of an outside supplier.
In addition to owning their physical assets such as warehouses and trucks, companies must invest time and money in building relationships with vendors that provide raw materials or services needed for their business. For example, accounting firms that help manage taxes or software developers that develop security software for bank ATMs generate high-profit margins that justify going through all this trouble to increase revenue quickly rather than risking bankruptcy for lack of it alone!
Vertical integration is a very broad concept that can take many forms. Three types of vertical integration were discussed: forward, backward, and balanced. Each type has its advantages and disadvantages, which make them ideal for certain industries or situations But not others.
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