Vertical Integration

🐬What Is Vertical Integration?
🐾Vertical integration is a strategy whereby a company owns or controls its suppliers, distributors, or retail locations to control its value or supply chain. Vertical integration benefits companies by allowing them to control the process, reduce costs, and improve efficiencies. However, vertical integration has its disadvantages, including the significant amounts of capital investment required.

🐾Netflix is a prime example of vertical integration whereby the company started as a DVD rental company supplying film and TV content. The company's executive management realized they could generate more revenue by shifting to original content creation. Today, Netflix uses its distribution model to promote their original content alongside films from major studios.

🐬Understanding Vertical Integration
🐾Vertical integration occurs when a company assumes control over several of the production steps involved in the creation of its product or service in a particular market. Typically, a company's supply chain or sales process begins with the purchase of raw materials from a supplier and ends with selling the final product to the customer. Companies can integrate by purchasing their suppliers to reduce the costs of manufacturing. Companies can also invest in the retail or sales end of the process by opening physical locations as well as service centers for the after-sales process. Controlling the distribution process is another common vertical integration strategy, meaning companies control the warehousing and delivery of their products.

🐬Types of Vertical Integration
🐾Two of the most common methods of vertical integration include backward and forward integration.
🐝Backward Integration & Forward Integration
Backward integration is when a company expands backward on the production path into manufacturing, meaning a retailer buys the manufacturer of their product. An example of backward integration might be Amazon.com (AMZN), which expanded from an online retailer that sold books to becoming a book publisher. Amazon also owns warehouses and parts of its distribution channel.
Forward integration is a strategy that companies use to expand by purchasing and controlling the direct distribution or supply of a company’s products. A clothing manufacturer that opens its own retail locations to sell its product is an example of forward integration. Forward integration helps companies cut out the middleman by removing distributors that would typically be paid to sell a company’s products reducing their overall profitability.

🐬Advantages：
- Decrease transportation costs and reduce delivery turnaround times.
- Reducing supply disruptions from suppliers that might fall into financial hardship.
- Increase competitiveness by getting products to consumers directly and quickly.
- Lower costs through economies of scale, which is lowering the per-unit cost by buying large quantities of raw materials or streamlining the manufacturing process.
- Improve sales and profitability by creating and selling its own brand.

🐬Disadvantages:
- Companies might get too big and mismanage the overall process.
- Outsourcing to suppliers and vendors might be more efficient if their expertise is superior.
- Costs of vertical integration such as purchasing a supplier can be quite significant.
- Increased amounts of debt if borrowing is needed for capital expenditures.