Analysis of Vertical Integration: Strategic Management Perspective

This report provides a comprehensive analysis of vertical integration within the context of strategic management. It begins by defining vertical integration, differentiating between forward and backward integration, and highlighting its significance in business operations. The core of the report delves into the advantages of vertical integration, such as enhanced quality assurance, increased customer loyalty, and greater stability in the face of economic changes, especially through supply chain control. The report also explores the potential for creating positive differentiation and lower costs. Conversely, the report identifies several disadvantages, including a lack of flexibility, increased complexity in managing supply chains, and the potential for internal confusion within the customer base. The report concludes by suggesting that vertical integration is not a universally suitable investment, particularly for businesses operating on a regional scale, emphasizing the inherent risks involved.

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Strategic Management
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1STRATEGIC MANAGEMENT
Topic- Analysis of Pros and Cons of Vertical Integration in Terms of Overall Strategy
Introduction
When the company is wanting to expand their business operations in the various
steps, however, they prefer to remain on the same type of path of production, the vertical
integration is the vital aspect which can be followed. There are two kinds of vertical
integration which includes both forward as well as backward (Zhou & Wan, 2017). Forward
vertical integration mainly takes place while the company tries going forward in the cycle of
production while analyzing the entire control. The entire distribution can be in form of
forward integration and backward integration moves in the complete opposite direction
wherein the manufacturer who tries in assuming the control of supplies required for the
different goods as well as services needs to be mainly focused on the backward integration.
Pros of Vertical Integration
The quality assurance can be built in the entire system as when the vertical
integration is successful, it will be allowing the different companies to put eyes on the quality
of the products and services which are being delivered by them. From initial supply to final
sale, the better-quality assurance process in the system helps in creating value proposition
which is reliable (Levy, Spiegel & Gilo, 2018). It will be generating the greater satisfaction
among the different customers that helps in building loyalty and the return on revenues will
be effective.
The different companies which are vertically integrated can be successful in
withstanding the economic kind of changes than the different companies which have not
(Koch, Wendling & Wilson, 2017). The stability with the supply chain control can be helpful
in eliminating the unpredictability in a successful manner. Vertical integration helps in

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offering high level of assurance of supply which will be effective in low usage of the
expensive kind of facilities successfully.
Positive kind of differentiation can be created as vertical integration helps in creating
predictability as more information is made available to the company. It will be generating
more access to the production related inputs and through being in proper control, the
company can adopt quickly to the different changes which will be helpful in achieving the
effective results (Fan et al., 2017).
Through incorporation of the vertical integration, the prices are almost lower due to
the same and the consumers are capable of appreciating effort of the business in resulting to
the lower prices during the process of check out. The companies that are successful in the
respective effort can be capable of lowering the costs and increase the quality of the different
offerings which are made by them (Crawford et al., 2018).
Cons of Vertical Integration
On the other hand, there are different cons of the incorporating the vertical integration
in the different sectors of business which are described as follows:
There is lack of proper flexibility available with the vertical integration as the
business is producing the competitive product in the market. When one product is being sold
by one competitor company, in such scenario, the only choices which are being left is stop
the production generic products to the different customers in the market (Alfaro et al., 2016).
When an organization works with the several contractors or vendors, then the level of
flexibility is high, however, when the supply chain is managed by the company, it makes the
system complex.
There is inclusion of high level of internal confusion in the process of managing the
different supply chain related activities and among the different customers present in the

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market. The customers who might dissatisfied with the specific brand or the products or
services which are delivered by a company, the customers have the scope of purchasing the
different kinds of products from other brand without realizing the fact that they are still
shopping with the similar organization (Alfaro et al., 2016). Vertical Integration can be
assisting businesses in saving high amount of money, however, there is internal confusion
within the customer base of the company which some companies may not be successful in
reaching their full potential.
Moreover, with implementation of vertical integration, it forces the business to
operate within an economy of scale as the economies of scale can be providing the business
with the numerous kinds of advantages only when they are able to adapt to changes in supply
chain process (Fan et al., 2017). It will be impacting the business negatively and influence the
productivity in an ineffective manner.
Conclusion
Therefore, it is inferred that vertical integration is not a kind of investment which
should be made by the different companies in the economy. The entire process helps in
benefitting the consumers the most when the company is already operating on a regional
scale. However, there is always risk that the company will taking more risks more than it can
in an actual manner.

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References
Alfaro, L., Conconi, P., Fadinger, H., & Newman, A. F. (2016). Do prices determine vertical
integration?. The Review of Economic Studies, 83(3), 855-888.
Crawford, G. S., Lee, R. S., Whinston, M. D., & Yurukoglu, A. (2018). The welfare effects
of vertical integration in multichannel television markets. Econometrica, 86(3), 891-
954.
Fan, J. P., Huang, J., Morck, R., & Yeung, B. (2017). Institutional determinants of vertical
integration in China. Journal of Corporate Finance, 44, 524-539.
Koch, T. G., Wendling, B. W., & Wilson, N. E. (2017). How vertical integration affects the
quantity and cost of care for Medicare beneficiaries. Journal of health economics, 52,
19-32.
Levy, N., Spiegel, Y., & Gilo, D. (2018). Partial vertical integration, ownership structure, and
foreclosure. American Economic Journal: Microeconomics, 10(1), 132-80.
Zhou, Y. M., & Wan, X. (2017). Product variety and vertical integration. Strategic
Management Journal, 38(5), 1134-1150.