Vertical integration

Under vertical integration is understood in economics is a form of corporate concentration. Vertical integration is therefore also referred to as vertical corporate concentration.

In general, it is a form of organization with the aim to optimize the value and supply a company.

In addition to the vertical integration also still exists the horizontal integration.

  • 3.1 backward integration (backward integration)
  • 3.2 Forward integration (forward integration)
  • 4.1 1 Full integration
  • 4.2 Integration by parts 2
  • 4.3 3 quasi- integration
  • 4.4 4 contracts
  • 6.1 Benefits of vertical integration
  • 6.2 Disadvantages of vertical integration

Term

Specifically, this means vertical integration that a company internalized upstream or downstream stages of production ( production or marketing stages ) in a production process. The concept of vertical integration is closely related to the classical economic question of " in-house production or external procurement? " ( " Make or Buy ?") Together.

The planning of vertical integration and that the manufacturing depth of a company depends on the question whether it is more economical to provide a service itself or to buy. That is the purpose of vertical integration is, in the short term thereby achieve an improvement of internal business processes and long-term retention of corporate stock and the long-term success.

Degree of vertical integration

Definition

The vertical integration of a company can be measured by means of vertical integration as the degree of vertical integration:

The value is calculated here from the difference between the sales of a company and its outsourced services, ie main components are the profit, the gross wage and non-wage labor costs.

Context

Basically, it is the less foreign based companies, the higher the degree of vertical integration, that is, the degree of integration tends to one ( high degree of vertical integration).

Conversely, this means that the lower the depth of production, ie with an increasing share of the purchased components and services seeks a degree of integration to zero, as this decreases the value (low degree of vertical integration). Association of companies on upstream and downstream economic levels

Strategies for vertical integration

The vertical integration of a company can be classified according to the aims of integration in the following two strategies:

Backward integration (backward integration)

Backward integration means that a company takes one / several upstream production stage (s ) itself. The backward integration refers to the input situation of the company. This means that the company itself produces or manufactures the previously purchased products, which are then further processed by the company.

Forward integration (forward integration)

Forward integration means that a company takes one / several subsequent manufacturing step (s ) itself. This means that for example a previous goods producer now sells its goods themselves. Is a prerequisite of forward integration that the production level of the company is not yet the end user is reached, but further production process steps in between, which can integrate the company. The forward integration refers to the downstream production and marketing stages.

Molding

The vertical integration of a company can differ in practice in four forms, they will, however, flow into each other.

1 Full integration

It refers to a production process as a fully integrated, when a large part of the production process takes place internally. That is the degree of integration is higher 0.85.

2 Integration by parts

It refers to a production process as a partially integrated if a purchase partially takes place. The degree of vertical integration is then between mean values ​​up to 0.85.

3 Quasi - integration

It refers to a production process as a quasi- integrated if indeed purchased a large extent, and the value therefore is very low, but the company on the suppliers has a sufficiently high market power, so that they are " virtually" integrated.

4 contracts

It refers to the form of vertical integration as " agreements " when the low level of integration forms to 0 has, because many components are purchased from outside. The situation with respect to its own value of the company is therefore very similar to the quasi- integration, but still missing the market power over suppliers.

Historical Context

Already in the 19th century attempted companies so as to realize economies of scale. Until the mid-20th century was rather uninterrupted and reliable supply of vital inputs in the foreground. Towards the end of the 20th century took the competition in different sectors of the economy too much. This led to numerous Unternehmensneuorganisationen which expressed in vertical disintegration.

Assessment

Although the advantages and disadvantages of vertical integration are industry-and company-specific weigh, but the following selection of typical and frequently occurring advantages and disadvantages can be formulated:

Advantages of vertical integration

  • Time and cost advantages of the company against competitors, that is, the company saves by the vertical integration, for example, transportation time and costs, thus the competitiveness of the company can be increased
  • Precursors can be better matched to final products
  • Access to goods with key functions is better ensured due to less reliance on suppliers or customers of the company, as well as their bargaining power is minimized
  • Assurance of differentiation objectives (eg, capacity utilization, prevention of downtime, quality control and rapid product modifications )
  • Chance of expansion to more profitable value chain
  • Improved access to market information and new product developments can be more easily kept secret
  • Empirically it has been shown by the PIMS study that there is a positive correlation between vertical integration and the return on investment and cash flow, this is true only in stable and mature markets ( this is not true, it was found a negative correlation )

Disadvantages of vertical integration

  • Destruction of the cost advantages that result from division of labor and specialization
  • Internal control and coordination costs due to lack of experience
  • Increasing organizational and administrative costs due to growing size of enterprise
  • A balance of autonomy loss of the integrated companies is often necessary in order to avoid implementation problems
  • Changes in the competitive situation of the company (previous suppliers or customers to competitors )

Dependence on integration

A company can the skills and have the potential to assume a higher level in the value chain. Furthermore, to integrate a company then vertically when considered with the same Herstellungs-/Absatzkosten:

Internal control and coordination costs ( KKK ) < External KKK

Other determinants of the use of vertical integration are:

  • Number of suppliers
  • Relationship between supplier and buyer
  • Supplier and customer relationship
  • Sizes, composite, experience benefits
Profit impact of marketing strategy Transaction cost
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