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Advantages-Disadvantages-Vertical-Integration

Essay by   •  June 21, 2012  •  Essay  •  521 Words (3 Pages)  •  2,877 Views

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Vertical integration has a long history, but its various periods of the strategic motivation are different. Blois defined vertical integration as being "the organization of production under which a single business unit carries on successive stages in the processing or distribution of a product which is sold by other firms without further processing". (Blois, 1972) Vertical integration refers to affect the amount, companies' suppliers and buyers in their supply chains. It also refers to merging the two operations at different levels in the production process. It is a way to raise or lower its inputs and outputs, the level of allocation and control of the method. Become more sophisticated technology in supply chain management system, many companies continued to yearn for closer ties with other channel members. Vertical integration enables these enterprises to obtain an unprecedented number of these members influence. However, before action is in the process of vertical integration, the company must consider both the advantages and disadvantages.

Vertical integration is that it often creates economies of scale and lowers production costs because it eliminates many of the price markups in each production step. Vertically integrated companies also achieve cost efficiencies by controlling quality at each step, which reduces repair costs, returns, and downtime. In addition, vertically-integrated companies do not have to allocate resources to pricing, contracting, paying, and coordinating with third-party vendors. Vertical integration can ultimately create barriers to entry for potential competitors, especially if the company controls access to some or all of a scare resource involved in production. This is why in some cases a company may control so much of the market or supply of raw materials that vertical integration can raise antitrust concerns. The benefits of vertical integration are that companies have more control, cost control, competitive advantages, and differentiation. First, a main advantage sought by companies that get into vertical integration is more control over the value chain. When retailers decide to acquire or develop a manufacturing business, they get more control over the production part of the distribution process. Secondly, vertical integration also typically offers significantly ability to control costs throughout the distribution process. In the traditional distribution process, every step in product movement involves mark-ups so the reseller can earn profit. Thirdly, some companies engage in vertical integration solely to increase advantages over competition and to block competitors from gaining access to scarce resources or important markets. A retailer might buy a manufacturing company, for instance, to gain access to proprietary technology, patents or resources only available in the firm's local area. A manufacturing company may enter distribution or retailing to gain direct access to customer

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