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Explain vertical integration in strategic management
Vertical integration means one company takes control over another company or companies who are in the same product (either in distribution or in production) to gain control over the total chain of product.
Companies prefer this type of integration because the supplier is unreliable, high prices may be charged, to earn more margins and for a significant growth of industry.
Types of vertical integration
The types of vertical integration are as follows −
Backward integration − When a company gains control over the raw material supply company.
Forward integration − When a company gains control over a distribution/logistic company.
Balance integration − Mixture of both forward and backward integration.
Advantages
The advantages of vertical integration are as follows −
- Smooth supply chain.
- Make distribution more efficient.
- To increase the profits.
- Cost reduction.
- Increase in investments.
- Core competencies are developed.
Disadvantages
The disadvantages of vertical integration are as follows −
- Quality may decrease.
- Maintaining a certain level of production.
- Mismanagement.
- Increase in debt.
- Increase in cost.
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