Vertical integration in Marketing

sunandaC

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Vertical integration is one method of avoiding the hold-up problem. A monopoly produced through vertical integration is called a vertical monopoly, although it might be more appropriate to speak of this as some form of cartel.

Nineteenth century steel tycoon Andrew Carnegie introduced the concept and use of vertical integration. This led other businesspeople to use the system to promote better financial growth and efficiency in their businesses.

Three types

Vertical integration is the degree to which a firm owns its downstream suppliers and its upstream buyers. Contrary to horizontal integration, which is a consolidation of many firms that handle the same part of the production process, vertical integration is typified by one firm engaged in different parts of production (e.g. growing raw materials manufacturing, transporting, marketing, and/or retailing).

There are three varieties: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (both upstream and downstream) vertical integration.

A company exhibits backward vertical integration when it controls subsidiaries that produce some of the inputs used in the production of its products. For example, an automobile company may own a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their final product. It was the main business approach of Ford and other car companies in the 1920s, who sought to minimize costs by centralizing the production of cars and car parts.

A company tends toward forward vertical integration when it controls distribution centers and retailers where its products are sold.
 
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