Vertical Integration is a process by which the production line of a company is simplified and taken over by the main company that is leading the charge in terms of manufacturing or training. This is advantageous in some regards since this would allow your company to control many of the variables that may affect the efficiency and the consistency of your products and service. For instance, if you’re outsourcing your raw materials from a third party corporation, your competitors could easily go to your supplier and get the same raw materials that you’re getting. If you can vertically integrate the process, it would be easier to guard your interests as well as control the prices that your company would have to incur. Certain companies can also be entangled in so-called “hold-up” scenarios wherein one company uses their significant and important phase in the production process to force the larger company to concede to their demands. This can be somewhat good in the long run but for the short term it is something that kills of productivity and efficiency.
Vertical integration is not for all companies. There are companies that are better off in specializing in what they do best instead of venturing into uncharted territories. Before jumping on to the vertical integration train, you must first learn the pros and cons of vertical integration. Here’s how you figure out which option is better:
- If you’re considering doing a vertical integration of some form, you may be better off hiring a management or integration consultant. The decision to acquire companies and subsidiaries is quite a significant one and it would be very careless not to take all the factors and variables into consideration.
- One fast way of zeroing in on the pros and cons of vertical integration is doing a SWOT analysis on your company. This means looking at your company’s strengths, weaknesses, opportunities and threats. This would be helpful in showing the current status of your company and if you can afford to distribute your effort and time to other projects. You may also do the analysis on your prospective integrated companies just to check if they can hold up to the same standards and expectations of your companies.
- Read books on the matter. Sometimes, you’d realize that the things you want to do have already been done – and written about. Use the information in books to your advantage by taking pages off the great experiences of gutsy entrepreneurs who have also made a big call to do vertical integration in their operations.
Vertical integration is no easy task and you shouldn’t take it lightly. Approach with the utmost caution and only commit to the process once you’ve gotten all the details and variables ironed out.