The Main Advantages and Disadvantages of Vertical Integration.

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Economics of Industry

Dr. Chris Pass

The Main Advantages and Disadvantages of Vertical Integration

Introduction

In this report I am going to be identifying and evaluating potential advantages and disadvantages of vertical integration for a company. I will first be discussing the main advantages of why vertical integration is useful in a company, how it can improve profits and supply chain coordination to name but a few. Then I will go on to talk about the main disadvantages of why vertical integration is bad for a company, like decreasing the ability to increase product variety, potentially higher costs due to low efficiencies from lack of supplier competition there are just a few of many to be discussed. But first of all…

What is Vertical Integration?

Vertical Integration is an element of market structure in which a firm can undertake a number of successive stages in the supply of a product, as opposed to operating at only one stage.

There are two types of vertical integration these are:

Forward integration – occurs when a firm undertakes further finishing of a product, final assembly or distribution, for example, an oil company, which drills for oil out at sea that, sells petrol through its own petrol stations.

Backward integration – occurs when a firm begins producing materials that were previously supplied to it by other firms, for example, a camera producer making glass lenses.

The firm has two options by which it can vertically integrate. The first is through organic growth by establishing new supply sources or outlets. The second is by a merger or take-over of established suppliers or distributors.

Main Advantages of Vertical Integration

There are quite a number of advantages to why a company would want to vertically integrate rather than just stay as it is, at one operating stage in a products’ production or distribution.

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The first main advantage is that by vertically integrating a company can reduce its production and distribution costs by linking together successive activities. This means that if a company can vertically integrate, say for example, with assembly and distribution then the cost will be cut, as the company won’t have to pay someone else to distribute the finished product. This can be beneficial in all stages of a products production. If a firm or company can secure reliable supplies of inputs or distribution outlets through vertical integration then it is able to remain competitive within the market sector. This ...

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