What is vertical integration?

Vertical integration is the combination of two companies that meet to create a value chain that allows all parties to take advantage of business in cost and risks. Many factors can be the motivation to enter vertical integration, such as the costs of produced goods and services or market differentiation associated with each partner. The decision to conclude a working agreement of this type of call allows both parties to use faster provision of services with the product distribution, thus increasing the profitable range by generating additional sales.

There are several areas in which there may be vertical integration in the contribution of both companies. One such area is to ensure raw materials for the production of goods and services that every company offers. Together, both companies can take joint efforts to explore and buy these materials. By performing this task of searching and recovering, it takes the costs, the costs are kept to a minimum. This will lead to lower total costsper unit produced, which means more profit at the point of sale for the supplier and possibly discounted costs per unit for the buyer.

Another area in which vertical integration can be mutually advantageous is in the distribution process for final products. Both companies can be able to cooperate to ensure retail stores that carry goods produced by both entities. This can also allow partners to save money on distribution costs such as transport, as well as to help both entities to penetrate the retail markets that could have been closed in the past by one or both companies.

In its core, vertical integration may be an excellent means of controlling a higher level of profitability for both suppliers and customer. It is possible for a joint work to be created by the supplier in the production process and hand over part of the savings to the customer. At the same time the customer works with the supplier on OPOther retail markets in the mutual advantage of both.