Vertical integration is a strategy where a company owns different parts of the production process rather than outsourcing them. This allows them to streamline operations and reduce costs. The main advantages are lower transaction costs, improved quality and coordination, and secured supply chains. However, the risks include higher management costs, reduced flexibility, and potential lack of competition leading to lower quality. Examples include companies that own suppliers, manufacturers, distributors, and retailers rather than using external partners.

1. Strategy of vertical integration.
Advantages and Disadvantages of
Vertical Integration
CREATED BY: VITALIY VELICHKO, ZHULDYZ KASSYMOVA, AND DARKHAN
AUGANBEKOV
MAEB - 1901

2. Plan
1. What Is Vertical Integration
2. How It Works
3. Owning the Supply Chain
4. Advantages and Disadvantages of Vertical Integration
5. Vertical integration examples
6. Conclusion
7. References

3. What Is Vertical Integration?
Vertical integration is a strategy that allows a company to streamline its
operations by taking direct ownership of various stages of its production process
rather than relying on external contractors or suppliers.
A company may achieve vertical integration by acquiring or establishing its own
suppliers, manufacturers, distributors, or retail locations rather than outsourcing
them. However, vertical integration may be considered risky potential
disadvantages due to the significant initial capital investment required.

4. How It Works
Vertical integration occurs when a company attempts to broaden its footprint
across the supply chain or manufacturing process. Instead of sticking to a single
point along the process, a company engages in vertical integration to become
more self-reliant on other aspects of the process. For example, a manufacturing
may want to directly source its own raw materials or sell directly to consumers.

5. Two issues have to be considered before
integration:
Costs. An organization should vertically integrate when costs of making the
product inside the company are lower than the costs of buying that product in
the market.
Scope of the firm. A firm should consider whether moving into new industries
would not dilute its current competencies. New activities in a company are also
harder to manage and control. The answers to previous questions determine if a
company will pursue none, partial or full VI.

6. Owning the Supply Chain
A typical company's supply chain or sales process begins with the purchase of
raw materials from a supplier and ends with the sale of the final product to the
customer.
Vertical integration requires a company to take control of two or more of the
steps involved in the creation and sale of a product or service. The company
must buy or recreate a part of the production, distribution, or retail sales
process that was previously outsourced.
Companies can vertically integrate by purchasing their suppliers to reduce
manufacturing costs. They can invest in the retail end of the process by opening
websites and physical stores. They can invest in warehouses and fleets of vans to
control the distribution process.

7. General industry value chain and none, partial or
full VI of a corporate operating in that industry

8. Types of vertical integration

9. Advantages and Disadvantages of Vertical
Integration
ADVANTAGES
1. Lower costs due to eliminated market
transaction costs;
2. Improved quality of supplies;
3. Critical resources can be acquired through VI;
4. Improved coordination in supply chain;
5. Greater market share;
6. Secured distribution channels;
7. Facilitates investment in specialized assets
(site, physical-assets and human-assets);
8. New competencies.
DISADVANTAGES
1. Higher costs if the company is incapable of
managing new activities efficiently;
2. The ownership of supply and distribution
channels may lead to lower quality products
and reduced efficiency because of the lack of
competition;
3. Increased bureaucracy and higher
investments leads to reduced flexibility;
4. Higher potential for legal repercussion due to
size (An organization may become a
monopoly);
5. New competencies may clash with old ones
and lead to competitive disadvantage.

10. Vertical integration examples

11. Conclusion
Vertical integration is the business arrangement in which a company controls
different stages along the supply chain. Instead of relying on external suppliers,
the company strives to bring processes in-house to have better control over the
production process. Though vertical integration may result in increased upfront
capital outlays, the goal of vertical integration is to streamline processes for
more efficient and controlled operations in the long-term.

12. References
Santa Clara University. (n.d.). Advantages and Disadvantages of Vertical Integration. My Own Business
Institute - Learn How to Start a Business. Retrieved October 18, 2022, from
https://www.scu.edu/mobi/resources--tools/blog-posts/advantages-and-disadvantages-of-vertical-integration/
Vertical Integration Explained: How It Works, With Types and Examples. (2022, August 26). Investopedia.
Retrieved October 18, 2022, from https://www.investopedia.com/terms/v/verticalintegration.asp
Jurevicius, O. (2021, November 11). Vertical Integration. Strategic Management Insight. Retrieved October
18, 2022, from https://strategicmanagementinsight.com/tools/vertical-integration/