Question

What is the vertical integration strategy and what are two main types of the strategy which of the two should a company choose when it wishes to match or beat supplier production affectively and quality?why ?

Answer 1

Vertical integration is when a company that operates at single level of the overall supply chain took another company within that same supply chain, e.g. when a chips company decides to buy the trucking company that distributes the chips to retailers or decides to buy the company that provides the raw ingredients for the chips.. This type of integration is the type you would like to reduce overall costs and even speed up the entire supply chain (or at least tailor the activities of the trucking company or the raw ingredient company to their own specific requirements).

Forward integration is a strategy where a firm gains ownership or increased control over its previous customers (distributors or retailers) or persons near to customers.

Backward integration is a strategy where a firm gains ownership or increased control over its previous suppliers or chain near to raw material.

It include the acquisition of controlled subsidiaries aimed at the creation or production of certain inputs that could be utilized in the production. This backward movement is initiated to ensure supply along with securing bargaining leverage on vendors.

Backward integration brings in the following benefits for organizations:

• Increased control: Through the process of integrating backward, companies can control their value chain in a more efficient manner. When retailers take the decision to develop or acquire a manufacturing business, they attain increased control over the production segment of the distribution phase.
• Cost Control: Through backward integration, costs can be considerably controlled all along the distribution process. In the conventional distribution process, each phase of product movement includes mark-ups to enable the reseller to earn profit.