Vertical Integration

Question 1

Vertical Integration

Answer 1

Corporate level strategy where firm gains market power by becoming its own supplier or distributor

Question 2

Types of Vertical Integration

Answer 2

1. Backward = moves backward in value chain to acquire or create business that provides the production (becomes supplier)
2. Forward = moves forward in value chain to acquire business that handles the sale/distribution of products. (supplier opening its own physical store)

Question 3

Reasons and Benefits

Answer 3

• Companies pursue vertical integration to gain market power and improve efficiency
  1. Gain market power: by owning parts of the supple chain, firms can better control costs and competiion
  2. Reduced costs: cost savings be eliminating the need to pay a profit margin to external suppliers
  3. Improved quality and control: controlling source of inputs or the final retail experience to make sure the standards are met
  4. Operational synergies: determine what management focuses on post acquisition to achieve synergies

Question 4

Drawbacks/Risks of Vertical Integration

Answer 4

1. Debt: overpaying for an acquisition can create large debt that isn’t justified by the returns
2. Integration difficulties: disagreements of companies cultures and loss of people (layoffs) can cause the strategy to fail
3. Antitrust Intervention: Government can block acquisition if damaging to fair competition (if company takes too much control over certain market)
4. Inflexible: if company is tied to specific internal supplier, hard to switch if external factors change