Question

What are some of the benefits and risks of vertical integration as part of a company’s business strategy?

please explain vertical integration purpose, risks, and the role that business strategy plays as part of the strategic management vison, goals, and objectives of the organization.

Answer 1

First let me share the purpose of vertical integration. With the help of vertical integration, organization can own together upstream suppliers and downstream retailing market. With such owning entire supply chain areas, company can build strong position in the targeted market or global market. Vertical integration can be taking place through backward integration and forward integration. Example: company shell owns upstream supply services, such upstream supply chain services are oil wells, oil refinery, they also own downstream supply services that downstream supply services could include retailing services.

Benefits:

• Here, firm can create secured source to get raw material and they can minimize cost and risks associated with hiring the raw materials.
• Firm owns retailing and distribution channel as to deliver their services in much flexible way, so, they can remove dependency and they also can remove various market issues like price fluctuations by suppliers and retailers, they can build strong position in the market. So, there will be very limited competitors.
• They can establish various new business opportunities as per their interest and they can penetrate such strategies across various supply chain areas as these are owned by them.
• Firm can keep significant controlling efforts on various assets that are to be maintained over time.

Risks:

• Such endeavor needs huge investment and the entire portfolio becomes much costly.
• Company will bear huge overheads and they need to put more cash out for maintaining such overhead and assets.
• Flexibility could be limited due to having keeping more investment towards the business.
• Entire supply chain could become unbalanced as some area could be overloaded, again there will be increase of administrative cost.