Not only do new technologies transform our world, but new business concepts and marketing strategies do as well. As our society is everchanging, companies need to keep up with competition and the desires that come with consumer culture.
Most businesses thrive off of horizontal integration- which involves one company buying another company within the same value chain level to increase its market share. Buying out the competition not only creates a larger company but, increases market power among suppliers and distributors, and opens up new markets for the company. These businesses have to stitch together similar companies, maintaining cohesion as the company expands and by sharing revenue with distributors and suppliers that aid them. On the other hand, a strategy that is emerging more and more is vertical integration.
What is Vertical Integration?
Vertical integration is when a company handles two or more stages of production, normally operated by separate companies, themselves. This could include handling suppliers, manufacturing, marketing, distribution, and materials. A company that practices vertical integration would be Disney; they own Disney Channel, Disney World, Disneyland, Disney+, and more. They film, hire, distribute, and market all of their own content across the board. This idea of a “self-sufficient” company was developed during the Industrial Revolution and was greatly inspired by Andrew Carnegie. His company, Carnegie Steel, controlled the iron mines that were used for mining steel resources, the coal mines that provided the fuel to create the steel, the railroads for transporting materials, and the steel mills themselves. The idea has continued today and has many positives and negatives to its structure.
Types of Vertical Integration
There are three different kinds of vertical integration: forward, backward, and balanced. Forward integration is when a company in the supply chain merges with a distribution channel and cuts out the middleman. Backward integration is considered an upstream business move. It involves a parent company expanding backward by purchasing and controlling earlier stages of the supply chain. Backward integration allows them to control the raw materials needed to create the final product. Balanced integration is a mixture of both business strategies.
Vertical integration is now practiced in companies like Disney, IKEA, and Amazon, so there must be lots that are right about it. Here are some of the positives of vertical integration. A vertically integrated company owns all or several parts of the supply chain, and they become independent from its suppliers. This integration allows the company to increase efficiencies, lower costs, and compete with other companies by offering cheaper or more consistent products. By reducing costs on overhead, transportation, and other operational expenses, companies are often able to offer lower prices that attract customers. Vertical integration also allows for competitive advantage through creative appeal. If a company has control over its own marketing and distribution, it can make any changes they want without any pushback. By controlling its own supply chain, it is more able to control and deal with any supply problems itself instead of working upstream. This allows for a much more swift working process. Keeping revenues is another positive of vertical integration because there is no need to share with distributors or argue about splitting income.
Positives and Negatives
With positives always come negatives. There are also many reasons why companies choose to not practice vertical integration. The main reason is that vertical integration is a recipe for a monopoly. Because one company can control so much and hold so much power, it gives them the ability to abuse that power by freely increasing their prices and making any changes they want without pushback. When there is no other company like theirs and they beat the competition, it leaves consumers with no choice but to abide by their changes and pay the extra cost. It is also not so easy to start a vertically integrated company. The initial expense is outrageous; companies must first invest a great deal of money to set up or buy factories. Then they must then keep the plants running to maintain efficiency and profits. Lots of times if a plan is not clear or a company does not have a strict set of standards, miscommunication can lead to the failure of the company before it has even launched. Rapidly changing technology is also a negative for vertical integration because they do not have partnering companies to help them adapt or to assist with costs and partnerships. Even with these obstacles, some of the most successful companies still find success through these tribulations.
If you want to learn more about vertical integration, here is a list of well-known companies that use this strategy:
https://boycewire.com/vertical-integration-definition/
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