Vertical integration is a strategy whereby a company owns or controls its suppliers, distributors and retailers. The company acquires the business and is able to control it. It is a strategy used by a company to expand its business by gaining ownership.
Most companies use vertical integration as a way of reducing its cost and increases its efficiency which results in increased competitiveness.
Pros of Vertical Integration
- It ensures high levels of quality
Vertical integration increases the quality of the goods produced in the company as they will be able to have control over the production hence the workers will strive to produce high-quality goods.
- Easy to control the cost of the goods
The company is able to control the cost of the goods as it can eliminate all the middlemen and sell the goods directly to the customers. This will make the cost be cheaper as the buyers will not incur the expense of making a profit for the middlemen.
- Lower costs of transactions
The management will be centrally and this will make all the customers receive the same information without being altered by the middlemen.
- The company has more control of the business
The company is able to control its business and this may make it easier for it as it can implement the policies easily and allow the workers to work effectively.
- Reduces transportation cost
The company is able to reduce transportation costs if the buyers reside in the same area and this may make the company offer transport once which may be cheaper.
- It improves supply chain coordination
There is good coordination in the supply chain and this may make it possible for the goods to be taken where they are required.
- Creates economies of scale
The company is able to utilize economies of scale and this may increase the profit levels of the company hence operating on the positive side.
- It will increase competition
The companies will compete favorably as they will all be geared towards producing quality goods and this may make the consumers enjoy high-quality goods.
Cons of Vertical Integration
- It requires a huge amount of money
A lot of money is needed to invest in such type of business. The company will need to hire a lot of employees for them to be able to produce a high amount of goods and transport them to the required destinations.
- It can easily cause confusion in the business
The business will easily be confused as the control may not be effective from the central point and this may make people in the company not to receive the information at the required time.
- It reduces the amount of diversification
As the company will be in control of everything, this will make it hard to diversify as the company will operate with the same goods giving them to the same people hence not diversifying the business.
- It reduces flexibility
The company will not be able to be flexible as it will operate with the same goods and this may make it not to improve its economic status.
- It may cause confusion to customers
The customers may think that they are operating under one branch but in a real sense, this may be a problem when they notice that there are various companies under one control and it may affect its market.
- Established distribution channels may be affected
If the manufacturers decide to go for vertical integration, then the channels may be affected in that