What is Vertical Integration Strategy
Vertical integration strategy is a corporate strategy that focused on expanding the business into suppliers or distributors by acquisition or developing a new business unit for it. Vertical integration is typically adopted when the company wants to eliminate uncertainties and costs from suppliers and distribution channels.
Normally, the company uses the vertical integration strategy as a growth strategy to expand to produce components or parts of their original product themself. This is because buying from its own company is more controllable and cheaper than buying from an open market.
There are two main choices for the vertical integration strategy to use depending on what the company intends to achieve, including:
- Forward integration is the vertical integration that expands by acquisition or developing a new business unit into distribution activities.
- Backward integration is the vertical integration that expands by acquisition or developing a new business unit into supplier activities.
Vertical integration strategies allow the company to cut costs by eliminating the middleman in both upstream and downstream activities. This means the company can achieve competitive advantages from produce the product with more efficiency and more controllable.
Forward integration strategy is focused on expanding into distribution activities of the current products to cutting out the middleman by acquisition or developing a new business unit for a distribution activity. The forward integration helps the company to better control distribution channels or retailers.
The forward vertical integration strategy is adopted when the company needs to cut costs by eliminating the middleman.
The most common forward integration strategy is when the manufacturing companies create their own online store to sell the product directly to the customers.
Backward integration strategy is focused on expanding into supplier activities by acquisition or developing a new business unit for supplier activity. The backward integration helps the company to better control over suppliers to become more efficient and more stable input of materials.
The backward vertical integration strategy occurs when the company wants to improve efficiency and achieve economies of scale to gain a competitive advantage against others rivals.
For example, when the Tesla company decides to create its own battery plant to produce the battery for its EV cars.