how companies use vertical integration
a company can broaden its footprint across the supply chain or manufacturing process with vertical integration allowing for more self reliance on aspects of the process vertical integration lets manufacturers directly source raw materials or sell products to consumers the supply chain or sales process typically begins with raw materials from a supplier and ends with the final product to the customer vertical integration requires a company to buy or recreate a part of the production distribution or retail sales process that was previously outsourced companies can vertically integrate by purchasing their suppliers to reduce manufacturing costs they can invest in the retail end of the process by opening websites and physical stores they can invest in warehouses and fleets of vans to control the distribution process as a company engages in more activities along a single supply chain it may result in a market monopoly a monopoly that occurs due to vertical integration is also called a vertical monopoly types of vertical integrationalthough vertical integration can reduce costs and create a more efficient supply chain the capital expenditures involved can be significant advantages and disadvantages of vertical integrationvertical integration helps companies gain greater control over the supply chain and manufacturing process leading to lower costs economies of scale and less reliance on external parties through vertical integration companies can circumnavigate external monopolies companies that vertically integrate begin a long term process that requires widespread buy in this also includes heavy upfront capital expenditure requirements to acquire the proper company integrate new and existing systems and ensure that staff is trained across the manufacturing or delivery process because companies commit capital to a specific process or product instead of an external vendor a company will likely have committed money that cannot be easily recovered in addition a company may lose the opportunity to gain unique knowledge through different external vendors long term cost saving due to favorable pricing and minimal supply chain disruptionseconomies of scale which increase efficiencyreduces or eliminates the need to rely on external parties suppliersgreater control over the product inputs and process which may lead to superior productsrequires large upfront capital requirements to implementreduces a company s long term flexibilityloss of focus on a company s primary objective or customerdispleased customer base that would prefer to work with smaller retailervertical integration vs horizontal integrationvertical integration involves acquiring a key component of the supply chain that the company has previously contracted for it may reduce the company s costs and give it greater control of its products ultimately it can increase the company s profits horizontal integration on the other hand involves the acquisition of a competitor or related business a company may do this to eliminate a rival diversify its core business expand into new markets or increase its overall sales while a vertical integration strategy stretches a company along a single process horizontal integration is a more pointed approach that causes a company to become more specific or niche within a certain market examples of vertical integrationnetflix nflx is an example of vertical integration the company started as a dvd rental business before moving into online streaming of films and movies licensed from major studios as of 2024 the company uses its distribution model to promote its original content alongside programming licensed by studios 1the merger of live nation and ticketmaster in 2010 created a vertically integrated entertainment company that manages and represents artists produces shows and sells event tickets the combined entity manages and owns concert venues while also selling tickets to the events at those venues 2the fossil fuel industry is a case study in vertical integration british petroleum bp and shell shel have exploration divisions that seek new sources of oil and subsidiaries that are devoted to extracting and refining it their transportation divisions transport the finished product their retail divisions operate the gas stations that deliver their product 34