It is a type of integration which empowers a company to manage all the facets of its business activity by acquiring other companies. Unlike horizontal integration, vertical integration purchases companies which are above or below from the existing company in the supply chain network. For example, a clothing store procures a manufacturing plant to maintain a constant and stable supply of clothing. As a result, the store not only gets a stable source of supply but can also design its own fashion which is exclusive to its store. Vertical channel integration combines two or more levels of channel which are managed by one management. This type of situation may occur when a channel member takes over the functions of another channel member or simply carries out the functions of another member, therefore eliminating that intermediary from the distribution channel. Vertical Marketing Systems (VMSs) facilitates effective establishment Of integration in various marketing channels. Here, only one channel member controls all the activities of the marketing channel to attain systematic, low-cost distribution process to satisfy the needs of ultimate consumers. A conventional distribution channel comprises of more than one independent manufacturers, wholesalers and retailers. Here, each channel member functions separately to maximise their own profits, even at the cost of the entire system. No channel member can own other members and has no authority to assign roles or resolve conflicts between the channels. Whereas, an interrelated distribution channels involving manufacturers, wholesalers and retailers is known as Vertical Marketing System (VMS). In this system, a channel member can own other members, has contractual obligations with them or luls the requisite authority to ensure that each one cooperates.
Advantages of Vertical Integration
The advantages of vertical integration are:
- It is simpler to control the channel behaviour.
- It is easy to resolve the disputes caused by independent channel members who follow their own objectives.
- It integrates the efforts of independent channel members which increases the efficiency of distribution channel.
- It attains economies of scale by eliminating duplicate services and bargaining power.
Disadvantages of Vertical Integration
Some of the disadvantages related to vertical integration are:
- A lot of additional cost is involved in the administration of processes. These are related to the costs incurred in the establishment and maintenance of the system.
- The operations of the company are inflexible in nature due to the significant investments made in the channel. Thus, it becomes complex to alter the policies, strategies and processes of the company to tackle the external situations.
- There are no opportunities to gain expertise in a specific area of distribution channel as the company controls several functions in the channel.