Advantage and Drawbacks of Vertical Integration (2024)

FAQs

Advantage and Drawbacks of Vertical Integration? ›

Vertical integration can be difficult to capitalize on — it's costly, complex and not easily undone. However, when well executed, it can confer a number of advantages, including greater control, reduced costs, increased profitability, better product or service quality, increased customer and market insights and more.

Vertical integration often requires heavy upfront capital that may reduce a company's long-term flexibility. Forward integration occurs when a vendor attempts to acquire a company further along the supply chain (i.e., acquire a retailer).

Which of the following is a drawback of vertical integration? It increases the potential of legal repercussions.

Advantages of horizontal integration include increasing market share, reducing competition, and creating economies of scale. Disadvantages include regulatory scrutiny, less flexibility, and the potential to destroy value rather than create it.

Vertical integration can be difficult to capitalize on — it's costly, complex and not easily undone. However, when well executed, it can confer a number of advantages, including greater control, reduced costs, increased profitability, better product or service quality, increased customer and market insights and more.

Vertical integration can increase costs due to additional investments in new areas, disrupt the supply chain, impair quality control, and reduce market competitiveness.

Disadvantages of Backward Integration

By acquiring the supplier of raw materials required in the production process, the company will limit competition, resulting in sluggishness and lack of innovation. The company will be less motivated to spend money on research and development.

Vertical integration limits a company's ability to achieve greater product differentiation and to exercise direct control over the costs of performing value chain activities.

Why is vertical integration bad for the economy? ›

Vertical integration can be desirable because it secures supplies needed by the firm to produce its product and the market needed to sell the product, but it can become undesirable when a firm's actions become anti-competitive and impede free competition in an open marketplace.

Vertical integration happens when a company decides to own and produce in-house one of the steps in its supply chain. A perfect example of the vertical integration strategy is Apple. They design their own hardware and software, which allows them to control the entire production process and distribution process.

The biggest disadvantage of vertical integration is the upfront costs. The capital required to set up or buy factories or acquire retail stores, plus the costs of maintaining those operations after the fact, can be prohibitive for many companies.

Companies should consider using both horizontal and vertical integration. Horizontal integration expands market share by acquiring a similar company serving customers in the same industry. Vertical integration can improve supply chain control, cost, and quality, including acquiring parts vendors and distributors.

Tesla's approach to vertical integration—owning as many aspects of production as possible, from raw materials to final assembly—is a stark contrast to the traditional automotive industry model of outsourcing key components and relying heavily on global supply chains.

Apple is one of the most successful companies in the tech industry that has implemented vertical integration. Apple has integrated hardware, software, and services to create an ecosystem that ensures customer loyalty. Apple's success can be attributed to its vertically integrated business model.

Disadvantages of Integration:

Integration may threaten the coherence and consistency of current arrangements that have the support of everyone involved. Relevant specialists may continue to concentrate on the area of their core expertise and further specialist training may not be needed.