Vertical integration and its characteristics

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Vertical integration - is the inclusion of the structure of those firms that are linked to it by a single technological chain.Also, this term refers to the merger manufactures united technological chain, resulting in one company gets control of them.Definition of this concept, there are several, and they differ in the degree of control of one company over another.

strategy of vertical integration can have such subspecies:

  1. Direct integration, the essence of which is to combine the stages of production and marketing of value-added (ie the initial stages combined with successive).As an example can serve as a vehicle assembly and integration of their distribution.
  2. backward integration, in which the added value is combined with the previous stages of the process (for example, a company engaged in the assembly of vehicles, integrated with that which it supplies components).

Vertical integration has some positive features of, among which are called following:

  1. The company's goal is to strengthen the competitive position.
  2. If integration is performed at the level of providers, is expanding its capabilities, as well as improving skills and providing an experience that she will need to achieve a more favorable competitive position.
  3. If vertical integration is carried out in several links in the chain, it helps us to gain new competencies, as well as add value to the products offered by the consumer.
  4. This procedure allows the company to raise sales and to control the level of service.

However, along with the undoubted advantages, this procedure also has some disadvantages:

  1. growth of entrepreneurial risk and increase investment.
  2. Vertical integration makes the company to focus only on their own strength.
  3. firms are less susceptible to changes in consumer demand.
  4. For the integration, you must have different skills and abilities.
  5. production company's flexibility is somewhat reduced.

Thus, this integration is advantageous when the growing market.When the reverse process, the production rate increase does not make sense, because the warehouses are so full of goods.

There is such a thing as horizontal integration, which consists in taking control of, or complete takeover of the company, which is on the same production level as the absorbing company.Among its positive aspects can be identified cost savings, achieved by duplicate processes, reduce competition and exchange of experience.

However, there are negative aspects of this process: the processes of integration are very durable, unhappy staff, the level of diversification is reduced.

If the medium-term perspective, this type of integration allows you to save.If the deadlines are short, this procedure may cause a decline in production.

Note that the vertical and horizontal integration have certain features of the implementation, which should be considered for a successful outcome.So, to increase the market, which is on the rise, it is more expedient to use the first type.If sales are down, horizontal integration will help reduce costs in the medium term.

In recent times, a second type of procedure, because the market went into decline.This horizontal integration coming out now to the fore, although a few years ago everyone was talking about the construction of vertical structures.