Vertical integration is a competitive strategy by which a company takes complete control over one or more stages in the production or distribution of a product.
A company opts for vertical integration to ensure full control over the supply of the raw materials to manufacture its products. It may also employ vertical integration to take over the reins of distribution of its products.
A classic example is that of the Carnegie Steel Company, which not only bought iron mines to ensure the supply of the raw material but also took over railroads to strengthen the distribution of the final product. The strategy helped Carnegie produce cheaper steel, and empowered it in the marketplace.
Advantages of Vertical integration
- Lower transaction costs.
- Quality of products.
- Competitive advantage.
- Increase entry barriers for new entrants.
Disadvantages of Vertical integration
- The quality of goods supplied earlier by external sources may fall because of a lack of competition.
- Flexibility to increase or decrease production of raw materials or components may be lost as the company may need to sustain a level of production in pursuit of economies of scale.
- It may be difficult for the company to sustain core competencies as it focuses on the integration of the new units.
Difference between Horizontal Integration and Vertical Integration
|Horizontal Integration||Vertical Integration|
|Combination of whose products and production level is same, then this is known as Horizontal Integration.||When a firm takes over another firm or firms, that are at different stage on the same production path.|
|Elimination of competition and maximum market share.||Reduction of cost and wastage.|