January 21, 2013
rosemary published this at 2:17 pm
By Katherine Pilnick
You’ve probably heard of vertical integration, a trend to minimize middle-man work and bring products to the marketplace in as few steps as possible, and you may be wondering if it’s right for your business. Vertically integrated companies have control over more than one part of production. They may partner with companies that work with the product before or after them, or they may take care of more than one step of the process in-house.
Vertical integration gives manufacturers more control over their products, including reducing costs. Customers also benefit, as they can discover otherwise lost local business and may enjoy price cuts because of lowered production costs. However, vertical integration isn’t always the best option, and its effects should be considered for each unique set of circumstances.
Vertical Integration in Modern Markets
One of the most prominent examples of vertical integration is Apple, which designs and develops the hardware and software for all its products, and also puts out the final products. While specific parts of production may be outsourced, Apple’s overall vertical integration gives the company more control over its product. It also ensures that the company has unique products that customers cannot find elsewhere.
Amazon is another well-known example of vertical integration. Its online marketplace and its Kindle products act as book distributors, and the company has evolved to publish books, as well. In this way, it took over another piece of the production line.
Amazon and Apple are prime examples of companies that have become significantly more involved in their product lines than is typical at other companies.
Choosing to vertically integrate your business is a big decision, and one which involves a lot of thought. It requires access to resources that small startups often lack, but it expands opportunities for future growth and success.
The main advantage of a vertically integrated business is that it will make your product unique, so that no other company can offer exactly what you have to offer. That way, you can build a loyal customer base as your company grows.
Despite its pros, vertical integration won’t help every company, especially one that’s already on thin ice financially.
Vertical integration requires a company to take on new responsibilities in production. While this can save money for business in the long run, it requires an immediate financial investment to pay for additional equipment and labor.
Likewise, entrepreneurs must be careful that vertical integration does not spread the company’s resources too thin. The company must set its priorities and stick with them, without allowing its new responsibilities to take over the core business goals.
Unless your business is already hugely successful, you’ll have to determine if vertical integration is right for your particular scenario by weighing the pros and cons.
Discuss it with others at your company to gauge how willing they are to take on the risk and responsibility. You can also seek professional advice at a bank, since the new endeavor is likely to require a small business loan. And remember that there is no need to rush the decision. In most cases, the opportunity to expand will always be there. If you don’t take advantage of it now, you can change your mind in the future.