IMD Companies Inc (ICBU)

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Vertical integration/Vertical expansion

From Wikipedia, the free encyclopedia

A diagram illustrating vertical integration and contrasting it with horizontal integration[further explanation needed]

In microeconomics and management, vertical integration is where the supply chain of a company is owned by that company. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need. It is contrasted with horizontal integration. Vertical integration has also described management styles that bring large portions of the supply chain not only under a common ownership, but also into one corporation (as in the 1920s when the Ford River Rouge Complex began making much of its own steel rather than buying it from suppliers).

Vertical integration is one method of avoiding the hold-up problem. A monopoly produced through vertical integration is called a vertical monopoly.

In addition, the Company is in the process of closing new strategic acquisitions, which will provide vertically integrated growth.

Vertical expansion

Vertical expansion, in economics, is the growth of a business enterprise through the acquisition of companies that produce the intermediate goods needed by the business or help market and distribute its product. Such expansion is desired because it secures the supplies needed by the firm to produce its product and the market needed to sell the product. The result is a more efficient business with lower costs and more profits.

Related is lateral expansion, which is the growth of a business enterprise through the acquisition of similar firms, in the hope of achieving economies of scale.

Problems and benefits

There are internal and external society-wide gains and losses stemming from vertical integration. They will differ according to the state of technology in the industries involved, roughly corresponding to the stages of the industry lifecycle.
Static technology

This is the simplest case, where the gains and losses have been studied extensively.

Internal gains

Lower transaction costs
Synchronization of supply and demand along the chain of products
Lower uncertainty and higher investment
Ability to monopolize market throughout the chain by market foreclosure
Strategic independence (especially if important inputs are rare or highly volatile in price, such as rare earth metals)

Internal losses

Higher coordination costs
Higher monetary and organizational costs of switching to other suppliers/buyers
Weaker motivation for good performance at the start of the supply chain since sales are guaranteed and poor quality may be blended into other inputs at later manufacturing stages

Benefits to society

Better opportunities for investment growth through reduced uncertainty
Local companies are often better positioned against foreign competition

Losses to society

Monopolization of markets
Rigid organizational structure, having much the same shortcomings as the socialist economy (cf. John Kenneth Galbraith's works)