A manufacturing company may enter distribution or retailing to gain direct access to customer in a highly competitive market before its manufacturing competitors do. It increases the number of outstanding shares. Advantages of Backward Integration Let us look at some of the advantages of backward integration: 1 — Increased control By integrating backward and merging with suppliers, Companies can control their supply chain in an efficient manner. Finally, it presents a framework for making the decision. Common law, Court, Judge 1657 Words 4 Pages. Instead, they rely on relatively few contractors with whom they enjoy fairly stable, nonadversarial relationships. While most things in business are trade-offs, it is important to take note of the disadvantages to the vertical integration strategy.
Vertical integration is not inherently good. The products can be available at the right time in the market and the company can manage its sales directly. Businesses following this model often establish subsidiaries that either disseminate or advertise the goods of the company to customers. Since subsidiaries are employing a quality control system, it is more likely that they can produce high-standard products. By cloud computing, one can easily save the overhead charges such as cost of data storage, software updates, management, and most importantly cost of quality control. And, by keeping management consolidated, overhead and other costs are often reduced.
But it did not have these assets at the time, and they are slow and costly to build. When a manufacturer sells directly to end customers, it uses forward vertical integration. Human capital specificity occurs when employees develop skills that are specific to a particular buyer or customer relationship. The primary message: don't vertically integrate unless it is absolutely necessary to create or protect value. The few players, recognizing their mutual interests, charge prices well above what would occur in a competitive marketplace and earn an attractive economic surplus.
Companies that have done this include many grocery store brands, Walmart , and even Best Buy. For example, it is usually critical to quantify the switching costs you would face if you became locked into a supply arrangement by investing in the assets specific to that arrangement. This requires additional warehouse space and more employees to manage the facilities and inventory. Forward integration can also provide potential benefits. Companies pursue backward integration when it is expected to result in improved efficiency and cost savings. In a world of uncertainty, the value of new products and processes to a purchaser is not known until it has been observed.
But on the other hand, there are also many people who strongly advocate that its drawbacks should not be ignored. By this, they will have a larger control on quality of raw material to be used in production. Working against these forces, however, is a trend toward consolidation. Both forward and backward integration are strategies for gaining better control over the supply chain, reducing dependency on the suppliers and increasing business competitiveness. It makes things more difficult. Acquiring this strategy will allow each product to go be produced with strict compliance of their quality standards.
For an auto manufacturer that assembles thousands of components, each of which may be characterized by increasing technological complexity and by shortening product life cycles, it is difficult to maintain excellence in all areas. That way you can be enriching some of your organisation jobs, leading to increasing satisfaction and motivation of your workers, which is an important benefit. The assets were highly capital intensive and long lived, transactions were frequent, and the need for continuous plant optimization increased the level of uncertainty. However, an organization may experience anti-trust regulators once the regulators think that the merger alters the market concentration. However, our experience suggests that this rationale for forward integration is overrated. Overall, the company gains better control of its business operations. Transaction costs are lower throughout the supply chain.
The increase in the number of buyers and sellers and the decrease in switching costs have greatly reduced the need for vertical integration by allowing the development of an efficient market for crude oil. Using vertical integration to build entry barriers is often, however, an expensive ploy. Predicting competitor behavior and determining optimal strategy often requires the use of such techniques as pay-off matrices and competitive games. It will gain access to the production units and distribution chain and thus can market itself differently from its competitors. Additionally, vertically-integrated companies are often not able to switch to foreign producers or factories who may have lower operating costs or exchange rates.
Consider the Australian cement and concrete industry chain see Exhibit 4. If, for example, there are three suppliers and three customers, each player sees five other players with whom the collective economic surplus must be shared. For these reasons, a majority of the upstream aluminum industry's plants are now joint ventures. Manufacturing businesses that have control over access to crucial raw materials and components that are quite scarce due to vertical integration would often create some barriers to market entry. In order to avoid this, they might try to create monopolies at each stage of the chain, but anti-trust laws prevent them.