February 22, 2018  
 
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Business Strategy Theories and Frameworks

 

Vertical Integration as a Business Strategy

Vertical integration strategies involve owning upstream suppliers and downstream buyers. The popularity of this business strategy has ebbed and flowed over time. Here are a few pros and cons for vertical integration business strategies.

Vertical integration. It sounds simple, but translating the concept into a viable business strategy can be challenging.

Yet if you're unwilling to explore the possibility of incorporating a vertical approach into your strategic planning efforts you may severely limit your growth prospects when market conditions become ripe for vertical integration.

When you consider incorporating vertical integration into your business strategy, it's important to focus on moving one position at a time, either upstream or downstream. For example, a wholesale bakery could leverage vertical integration by expanding into flour distribution (upstream) or a retail bakery (downstream). But if the operation attempted to skip the step of securing flour distribution and instead leaped upstream to flour refining, it would lose many of the benefits vertical integration has to offer. Here are some of the other pros and cons you'll need to consider when vertical integration emerges as an attractive business strategy.

PROs

  • Supply chain security. On the upstream side, vertical integration helps secure the supply chain and insulate your business from market disruptions. Rather than relying on other companies to for production inputs, your company gains greater control over the business process.
  • Distribution channel security. On the downstream end, vertical integration guarantees the availability of distribution channels for your products. This can be especially important for companies that struggle to gain a foothold in industries dominated by exclusive distributorships.
  • Improved market share. Vertically integrated companies capture additional industry profits. But they also strengthen the brand's industry presence and market position.

CONs

  • Capacity concerns. Capacity is a justifiable concern in vertical integration. If your vertical operations can't keep pace with your core business activities, you can inadvertently limit your own production.
  • Decreased flexibility. Investment in vertical businesses reduces the amount of capital that is available when opportunities arise in the marketplace. Although going vertical may still be the right decision, be aware of the fact that it will reduce the amount of capital that is available for other things.
  • Diluted competencies. Small businesses need to be especially concerned about diluting their competencies through vertical expansion. If too much of the company's focus is shifted to the vertical(s), it could have a diluting effect on your core competency.

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