Vertical integration and outsourcing are among the company’s external growth strategies. Their use has an impact on increasing production efficiency, reducing the cost of production, costs and improving the competitiveness of the final product. All this, as a result, leads to an increase in market share and company profits.
External growth strategies include acquisitions, mergers or joint ventures, and partnerships with various companies involved in manufacturing, from raw material producers and component suppliers to finished goods sellers.
Company management after integration
When your company has experienced such a significant growth spurt, a lot of attention will need to be paid to the formation of the management apparatus. He must be well-coordinated, quickly plunging into the increased demands of top managers.
The task of top management is to quickly and effectively organize communications between different parts of the management chain. This is where virtual data rooms come to the rescue. They help make the management process simple, fast, and accessible at any time of the day or night. And also, all company documents are kept in a safe place.
Vertical integration expands the scope of the company’s activities within a specific, already mastered industry. Vertical integration can take place in two directions.
- Vertical integration “back” is associated with the flow of raw materials and services and thus affects the relationship with suppliers. It aims to strengthen relationships with suppliers who supply products at lower prices than competitors.
- Vertical integration “forward” expands the scope of the company’s activities, aiming to promote the product to the market and its sales to the final buyer. It protects buyers or the distribution network and guarantees the sale of products.
Vertical integration can be complete when a company seeks to be present in all links of the industry’s value chain and creates its divisions in each of them. On the other hand, partial vertical integration provides for the company’s presence only in critical links in the industry chain (for example, at certain stages of production or retail sales).
Vertical integration can be carried out in two ways – creating own divisions in other links of the industry’s value chain or the absorption of firms operating in these links.
Benefits of vertical integration
Benefits include economies of scale and overlap, reduced cost of goods produced, increased competitiveness, reduced dependence on powerful suppliers and/or customers, and increased control over the entire value chain. Taken together, these advantages allow the company to minimize reliance on suppliers and customers.
The feasibility of vertical integration
Given the above, you need a clear idea of whether a company needs vertical integration. Its practicality is evident if, as a result of the proposed changes, the company will gain competitive advantages in the future.
- By reducing costs, the efficiency of strategically important activities will increase.
- The return on investment will increase.
- The company will be able to respond more flexibly to changes in consumer demand.
the company will have real opportunities to manage general and administrative costs more effectively even with an increase in the number of links in the value chain.