Global Business Strategy

Some discussion on vertical integration

Vertical integration is an approach to increase and decrease the level of control of a particular company on its input and distribution output It is a way to control the input and distribution of products or services

Theoretically , there are two generally accepted form of vertical integration as a corporate strategy

First is the forward integration in which a firm solidifies the control over its distribution . The second one is the backward integration in which a firm strengthens its control over the supplies or inputs p

When a company has fully incorporated the value chain of a supplier and or of the distribution of its product and services , the company is said to have been fully integrated . Normally , this stage is achieved by buying out a supplier or distributor , or both . The company can also simply opt to expand its operation creating the needed separate companies

In terms of application , vertical integration can be used as a corporate strategy . This is normally done by a company if one of the its supplier had become so strong that it is threatened . Buying out the threatening supplier solves this , and will secure the supply chain . In a way , this strategy is concentrated on curving the power of the suppliers , and in some cases , the customers themselves . Vertical integration is also a way to cut down on transaction cost . The mergers of trading companies particularly if this involves a merging of trading houses with strikingly different services and products , is an application of vertical integration strategy

In terms of strength , vertical integration is great when a company is having a problem on the scale and scope of its operation . It is also an effective way of becoming more competitive , and will also bring down the can secure for a particular company a control over its supply chain thus , securing its own existence

As in many form of business strategies , vertical integration has a host of its own . For one , buying out a different company may mean buying out several problems either inherent in the company being bought or on the process itself . What if the buying company is not fully capable of running the new company

The degree of vertical integration is also difficult to measure quantitatively , thus making general assessment even more difficult Infusing different processes and activities from two merged companies can also be so difficult

In practice , actually , there is no such thing as complete integration In reality , companies , have more or less , some of the vertical integration in their corporate planning , even without realizing it completely

For theoretical consideration , the vertical integration model put forward by Michael Porter , known as the Michael Porter 's Value Chain Model is a good and useful model in understanding this phenomenon

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