In: Statistics and Probability
Discuss any one of these strategies. Vertical Integration Strategies or Outsourcing Strategies. Why should a company choose to or not implement any of these strategies?
Vertical integration Strategy :
It is one in which one company operates at more than one level of the distribution channel. The distribution channel begins with the manufacturer that makes a product. The manufacturer sells the product to a wholesaler. The wholesaler sells to retailers, who ultimately sell to end customers.
If a manufacturer decides to sell directly to end customers, that is an example of integration. The manufacturer is expanding forwards on the production path, so this is known as forward vertical integration. When a wholesaler or retailer manufactures, it uses backward vertical integration
Vertical integration is a competitive strategy by which a company takes complete control over one or more stages in the production or distribution of a product. It is covered in business courses such as the MBA and MiM degrees.
A company opts for vertical integration to ensure full control over the supply of the raw materials to manufacture its products. It may also employ vertical integration to take over the reins of distribution of its products.
A classic example is that of the Carnegie Steel Company, which not only bought iron mines to ensure the supply of the raw material but also took over railroads to strengthen the distribution of the final product. The strategy helped Carnegie produce cheaper steel, and empowered it in the marketplace.
Firms can pursue forward, backward or balanced VI strategies.
Several factors affect the decision-making that goes into backward and forward integration. A company may go in for these strategies in the following scenarios:
Advantages of vertical integration
What are the benefits of vertical integration? Let us take the example of a car manufacturer implementing this strategy. This company can
Disadvantages of vertical integration
But what is the downside? What are the drawbacks of vertical integration? Let us see the main disadvantages.
However, there are alternatives to vertical integration, such as purchases from the market (of tyres, for example) and short- and long-term contracts (for showrooms and with service stations, for example).