Vertical integration and its characteristics

Vertical integration is the inclusion in the structure of the company of those firms that are associated with it through a single technological chain. This term also refers to the merger of industries united by a technological chain, as a result of which one company receives control over them. There are several definitions of this concept, and all of them differ in the degree of control of one firm over another.

The strategy of vertical integration can have such subspecies:

1. Direct integration, the essence of which consists in combining the stages of production and marketing with added value (that is, the initial stages are combined with the subsequent ones). An example is the integration of the assembly of cars and their distribution.
2. Reverse integration, in which added value is combined with the previous stages of the technological process (for example, the company that assembles automobiles integrates with the one that supplies the components).

Vertical integration has certain positive features of the conduct, among which the following are called:

1. The goal of the companies is to strengthen the competitive position.
2. If integration is carried out at the supplier level, this enhances its capabilities, as well as improves skills and provides the experience that it will need to achieve a more competitive competitive position.
3. If vertical integration is carried out in several links of the chain, it helps the company to obtain new competencies, as well as to increase the value of the proposed products from the consumer.
4. This procedure allows the firm to raise sales volumes and control the level of service.

However, along with the undoubted merits, this procedure also has some drawbacks:

1. Growth of entrepreneurial risk and increase in capital investment.
2. Vertical integration forces the company to focus only on oneself.
3. The firm becomes less susceptible to changes in consumer demand.
4. To implement the integration requires the availability of different skills and abilities.
5. The company's production flexibility is somewhat reduced.

Thus, such integration is profitable when the sales market is growing . When the process is reverse, the speed of production does not make sense, because the warehouses are already full of goods.

There is such a thing as horizontal integration, which consists in taking control or full absorption of a company that is at the same production level as the absorbing company. Among its positive aspects can be identified cost reduction, which is achieved through duplicate processes, reducing competition and sharing experiences.

However, there are also negative sides to this procedure: the integration processes are very long, the staff is unhappy, the level of diversification is reduced.

If the prospect is medium-term, this kind of integration can save a lot. If the time is short, this procedure can cause a decline in production.

Note that vertical and horizontal integration have certain features of implementation, which should be taken into account to achieve a successful outcome. So, to increase the market, which is on the rise, it is more appropriate to use the first type. If sales fall, horizontal integration will help reduce costs in the medium term.

Recently, the second type of procedure is increasingly being used, because the market has declined. It is horizontal integration that is now coming to the fore, although a few years ago everyone was talking about building vertical structures.