EOTO: Vertical Integration

    Vertical integration is a strategy where a company owns or controls its suppliers, distributors, or retail locations to control its value or supply chain. This benefits companies because it allows them to control the process, reduce cost, and improve efficiency. Businesses are always looking for ways to reduce costs and to control the quality of their products so many businesses choose to acquire vertical integration. An example of vertical integration is target. Target has its own store brands while also selling other manufactured products.

    There are several different types of vertical integration. The differences depend on where the company falls in the order of the supply chain. Forward integration is when a company expands by purchasing and controlling the direct distribution or supply of its products. One example of forward integration is when a farmer directly sells his crops at a local grocery store rather than a distribution center to control where it is going. Backward integration happens when businesses at the end of the supply chain take on activities that are "upstream" of its products or services. An example of backward integration is Netflix. They are a video streaming company that distributes and creates its own content. The last type of integration is called balance integration. Balance integration is where a company merges with other businesses to attempt to control both upstream and downstream activities. An example of balanced integration is the company Hershey. Hershey relies on cocoa bean suppliers to provide its raw materials and it also relies on retail stores to sell its product. 

    There are several benefits of vertical integration that give companies an advantage over non-integrated companies. One advantage is that a vertically integrated company can avoid supply disruption because it controls its own supply chain. Another benefit is that a company benefits by avoiding suppliers with market power. Once a company avoids these suppliers, they are then able to reduce costs and prevent slow downs in their production. One benefit is that companies keep themselves informed on their competition. Retailers will know what is selling well when they integrate with other companies. 

    There are also several disadvantages of vertical integration. The main disadvantage of vertical integration is how expensive it is. Companies must keep everything up and running and that takes a lot of time and money. Another disadvantage is that vertical integration reduces a company's flexibility. When a company integrates with another business, they have to acquire the way they do things and they can't be as flexible as they once were. They have to take into consideration what the other business did and the products they have. One last disadvantage is that vertical integration can cause a loss of focus. Integration with another business can cause the management to focus more on the new product they acquired and less on the core things that really matter to the company. 

    Vertical integration is something that can either benefit a company greatly or bring the company down. Many large businesses decide to take the step to integrate their companies because they have all the necessary resources to do so.