Benefits of Vertical Integration
In management and microeconomics, vertical integration simple refers to a technique of management control. Basically, it integrates products along the retail supply chain. Organization which have implemented vertical integration schemes are able to control the output and input of their products, meaning they can supply their own material and distribute their finished products as well.
1. Secure future orders and supplies
The main benefit of this strategy is its ability to safeguard future orders and supplies. This means that some of the parts in your business which are sheltered from the ever competitive market place become less resourceful. This strategy is therefore justifiable when it leads to operation efficiency or has some sort of strategic benefit.
2. Increases revenues
Vertical integration has the ability to affect margins and profits alike. For instance, gross profits increase once vertical integration is implemented, as it excludes many costs. In fact, gross profits are realized even without having to consider cost saving options.
3. Reduces competition
Vertical integration also helps to create barrier to keep potential competitors at bay, especially if the company has the ability to control the supply of both raw materials and finished products. Therefore, vertical integrated enterprises reduce repair cost by controlling returns, as well as downtime. Additionally, vertically-integrated organizations do not require setting up departments to handle either contracting or pricing.
4. Lowers cost of production
The main advantage of implementing vertical integration strategies is that it helps lower production costs, as it eliminates price markups. Vertically integrated enterprises are flexible in their operations, meaning they have the ability to accommodate industrial innovations as well as technological changes.
5. Reduces operational costs
Since vertical integration is designed to accommodate industrial innovations, companies are now responsible for controlling the supply chain, which means they have control over raw products as well as finished goods thereby reducing operational costs.
Due to lack of competition from suppliers, potentially high costs are inevitable as a result of low efficiencies.