Roll # MHRM35 Hafiz Tauseef Mehmood Quiz: Vertical Integration Vertical integration is a strategy whereby a company owns or controls its suppliers, distributors or retail locations to control its value or supply chain. Vertical integration benefits companies by allowing them to control process, reduce costs and improve efficiencies There are more than a few types of vertical integration. All types involve a merger with another company in at least one of the four relevant stages of the supply chain. The difference depends on where the company falls in the order of the supply chain. When a company at the beginning of the supply chain controls stages farther down the chain, it is referred to as being integrated forward. Examples include iron mining companies that own "downstream" activities such as steel factories. Backward integration takes place when businesses at the end of the supply chain take on activities that are "upstream" of its products or services. Netflix, a video streaming company that distributes and creates content, is an example of a company with backward integration A balanced integration is one in which a company merges with other businesses to attempt to control both upstream and downstream activities. Examples An example of a company that is vertically integrated is Target, which has its own store brands and manufacturing plants. They create, distribute, and sell their products—eliminating the need for outside entities such as manufacturers, transportation, or other logistical necessities. Manufacturers can also integrate vertically. Many footwear and apparel companies have a flagship store that sells a wider range of their products than are available from outside retailers. Many also have outlet stores that sell last season's products at a discount. Advantages There are five noteworthy benefits of vertical integration that give a company a competitive advantage over non-integrated competitors. A vertically integrated company can avoid supply disruption. By controlling its own supply chain, it is more able to control and deal with any supply problems itself. A company benefits by avoiding suppliers with market power. These suppliers are able to dictate terms, pricing, and availability of materials and supplies. When a company can circumvent suppliers such as these, it is able to reduce costs and prevent production slow-downs caused by negotiations or other aspects external to the company. Vertical integration gives a company better economies of scale. Large companies employ economies of scale when they are able to cut costs while ramping up productions—they take advantage of their size. For example, a company could lower the per-unit cost by buying in bulk or by reassigning employees from failing ventures. Vertically integrated companies eliminate overhead by consolidating management and streamlining processes. Companies keep themselves informed on their competition. Retailers know what is selling well. If a company was vertically integrated with a retail store, manufacturing plant, and supply chain, they would be able to create "knock-offs" of the most popular brand-name products. A knock-off is a copy of a product—a similar product but company-branded with company marketing messages and packaging. Only powerful retailers can do this. Brand-name manufacturers can't afford to sue for copyright infringement, as they would risk losing major distribution through a large retailer. Lower pricing strategies can be used. A company that's vertically integrated can transfer the cost savings they create to the consumer. Examples include Best Buy, Walmart, and most national grocery store brands.
