Vertical diversification is also known as vertical integration. In this growth strategy, a company expands its business in the forward or backward direction. Firms add new products (or services) complementary to the existing products. … Vertical diversification defines whether to perform some or all of these functions.
What are the types of vertical integration?
There are basically three types of vertical integration. They are;
- Backward Integration.
- Forward Integration.
- Combined/ balanced Integration.
What are the three types of vertical integration and explain each?
There are three types of vertical integration – backward, forward, and balanced. Vertical integration allows the company to control the distribution or supply of its goods – allowing it greater control and efficiencies along the supply chain.
What are the 2 types of vertical integration?
Companies can integrate vertically in two ways: backward or forward. Backward integration occurs when a company decides to buy another company that makes an input product for the acquiring company’s product. For example, a car manufacturer is pursuing backward integration when it acquires a tire manufacturer.
What are the two types of vertical integration?
Firms engage in two types of vertical integration. Forward integration is a method of vertical integration in which a firm will gain ownership of its distributors. Backward integration is a method of vertical integration in which a firm will gain ownership of its supplier.
What are the disadvantages of vertical integration?
The Disadvantages of Vertical Integration
- High Capital Requirements. Vertical integration is not a viable strategy for small and medium enterprises in most cases. …
- Risk of Increased Organisational Inefficiency. …
- No Easy Exits. …
- Lack of Familiarity. …
- Reduced Flexibility in the Supply Chain.
What are the similarities and differences of vertical and horizontal integration?
Horizontal integration is when a business grows by acquiring a similar company in their industry at the same point of the supply chain. Vertical integration is when a business expands by acquiring another company that operates before or after them in the supply chain.
How did Apple use vertical integration?
Apple Inc. has employed a vertical integration strategy for decades. Its software products are placed into electronic devices and computer systems manufactured and assembled by Apple using hardware and components also manufactured by the company.
Which of the following is the best example of vertical integration?
A good example of vertical integration is: a crude oil refiner purchasing a firm engaged in drilling and exploring for oil. A vertical integration strategy can expand the firm’s range of activities: backward into sources of supply and/or forward toward end users.
Is Netflix vertically integrated?
Netflix, Inc. is a prime example of vertical integration. The company started as a DVD rental business before moving into online streaming of films and movies licensed from major studios.
Is Amazon vertically integrated?
Amazon has been taking vertical integration to a whole new level. The operational model of Amazon is to do vertical integration using its scale. First Amazon starts using the services itself. Over a period of time, Amazon builds operational efficiencies in these services.
Is Coca Cola vertically integrated?
Coca-Cola and PepsiCo are therefore upstream manufacturing firms, which sell their products to downstream bottling and distributing firms. … According to PepsiCo, these vertical integrations allowed a higher flexibility in pricing and products.
Why vertical integration is bad?
When most competitors in an industry are vertically integrated, it can be difficult for nonintegrated players to enter. Potential entrants may have to enter all stages to compete. This increases capital costs and the minimum efficient scale of operations, thus raising barriers to entry.
Is Nike vertically integrated?
Vertical integration – Nike’s operations are vertically integrated with a presence in every segment of the value chain from manufacturing down to sales.
What do horizontal and vertical integration have in common?
The Similarities. Both vertical and horizontal integration can be accomplished by internal expansion, merger or acquisition. It is a common misconception that integration always implies a merger or acquisition. … It should be noted that a firm can pursue both vertical and horizontal expansion at the same time.
What is the example of horizontal and vertical integration?
Horizontal Integration helps to acquire control over the market, but Vertical Integration helps in gaining control over the whole industry. Heinz and Kraft Foods merger is an example of Horizontal Integration.
What is difference between horizontal and vertical combination?
When two firms combine, whose products and production level is same, then this is known as Horizontal Integration. Vertical Integration is when a firm takes over another firm or firms, that are at different stage on the same production path.
What is a backward vertical integration example?
In short, backward integration occurs when a company initiates a vertical integration by moving backward in its industry’s supply chain. An example of backward integration might be a bakery that purchases a wheat processor or a wheat farm.
What are the advantages of backward vertical integration?
Backward integration allows businesses to obtain control over suppliers and improve supply chain efficiency. Businesses merge with and acquire their suppliers to gain strategic advantages over competitors and lower costs. In some markets, this may create monopolies and violate antitrust laws.
What are the alternatives to vertical integration?
Alternatives to Vertical Integration
- long-term explicit contracts.
- franchise agreements.
- joint ventures.
- co-location of facilities.
- implicit contracts (relying on firms’ reputation)
Which of the following is an example of forward vertical integration?
This type of vertical integration is conducted by a company advancing along the supply chain. A good example of forward integration would be a farmer who directly sells his crops at a local grocery store rather than to a distribution center that controls the placement of foodstuffs to various supermarkets.
What is an example of a vertical merger?
A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. An automobile company joining with a parts supplier would be an example of a vertical merger.
What is the biggest vertically integrated company in the world?
Apple was the first company to reach a trillion-dollar evaluation, showcasing its dominance in the electronics industry. Apple is also one of the most significant vertical integration examples because the company has controlled the manufacturing and distribution of its products from the time it was founded.