What Is Vertical Integration?

Vertical integration is a business strategy used to expand a firm by gaining ownership of the firm's previous supplier or distributor. Many firms use vertical integration as a way to reduce cost and increase efficiency, which results in increased competitiveness. Firms engage in two types of vertical integration.

• Forward integration
• Backward 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. Firms may utilize a forward or backward integration strategy or they may use a combination of both known as a balanced integration strategy.

How a Vertical Integration Strategy Is Used

Implementing a vertical integration strategy, whether backward or forward, allows a firm to have greater control over its process. For instance, for the past twenty years, Bob's family has owned a pig farm. The pig farm makes just enough that it supports his family. Bob wanted to increase his profits and his ability to compete against other farmers in the market. Bob read an article about vertical integration and decided to implement a forward integration strategy in order to increase his profits.

Bob thinks that he has the best pigs around, and if he started a BBQ restaurant, featuring his pigs, he could increase his profits. He owns the farm where the pigs are raised, so he has greater control over things like cost and quality. Bob's restaurant did so well that profits soared, and he decided to utilize a backward integration strategy as well and buys the feed store that supplied him with food for his pigs.

Advantages of Vertical Integration

Introducing a vertical integration strategy can have many advantages for a company, such as:

• Increased competitiveness
• Greater process control
• Increased market share
• Increased supply chain coordination
• Decreased cost

Many companies use this strategy because it may decrease cost by eliminating price markups associated with buying a product from a third party. Starbucks, for instance, is not just a coffee house. They also grow their own coffee beans. Starbucks coffee can also be found packaged and sold in your local grocery store.

Vertically integrated companies are also better able to control quality and coordinate the delivery of raw materials or other supplies. Having this level of control allows companies to increase their supply chain efficiency.

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What is the Value of Strategic Planning in Modern Business?

Many companies spend a significant amount of time on strategic planning but some executives believe that it is little more than a dog and pony show and see little benefit from the investment.

So what is current thinking on the value of strategic planning?

The practice originated in the 1960’s as an attempt to combine short term and long term planning. The process most commonly involves a core group of planners under taking the following steps:

1. Establish a Mission or Vision. What does the organisation want to achieve?

1       2. Set goals. What is to be achieved for the organisation to achieve its vision?

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     3.Objectives. Break down goals into specific measurable objectives that can be monitored. 

     4.Identify internal Strengths and Weaknesses, assess external environment for Opportunities and Threats.

     5. Evaluate and Select Strategic Options.

     6.Actions and Tasks. Identify steps that individuals and teams must take to execute strategy.

     7.Control. Establish a system to compare actual with planned performance , and to rectify under performance.

The basic aim of strategic planning is to link daily organisational decisions with a vision of where the organisation wants to be at some pointing the future, usually 3 to 5 years.

In the 1980’s many management experts were questioning whether the traditional model of strategic planning was inadequate in an environment forced to deal with what appeared to be a new paradigm of constant change as a result of two Oil Crises and the arrival of what seemed to be an unending stream of new technologies.

The revised attitude to strategic management was that:

•  It is impossible to predict the future. Change is discontinuous and unpredictable and planning has to reflect this.

•   Planning now involves the identification of new ideas and trends as they occur and to quickly mobilisere sources required to capitalise on them.

• The role of senior managers is to support and develop the ideas of middle managers and frontline staff because only they are in a position to know what the customer wants and predict latest market trends in a rapidly changing environment.

•   As unexpected and chance events are now the norm, organisations must learn to respond promptly, exhibit flexibility, spontaneity and creativity when reacting to customer demands and changing market circumstances.

   Has the rapid pace of the modern world rendered strategic planning irrelevant?

Despite claims to the contrary there is plenty of evidence demonstrating that strategic planning is still a worth while process. There have been a number of studies which advocate a positive effect of strategic planning on company performance. A review of twenty six researchers of small businesses found a positive relationship between strategic planning and organisational performance. Another study found evidence that supported a relationship between strategic planning and financial performance.The use of strategic planning in small business firms is claimed to be increasing over time because of the belief in the benefits of enhancing corporate performance.

   Kaplan and Beinhocker (2003) undertook an in depth analysis of the strategic planning processes of thirty companies, some of whom had a long term history of success and others that had made serious strategic blunders. They concluded that the true value of strategic planning was to make sure that key decision makers have a solid understanding of the key issues, agree on important a sumptions and share a common understanding of the facts surrounding the business. This serves as a solid foundation upon which good strategic decisions can be made despite a constantly changing environment.In essence, it was concluded that companies that achieve success used strategic planning not to generate strategic plans so much as a learning tool to create”prepared minds”, for success.

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