Backward integration can
be capital intensive
, meaning it often requires large sums of money to purchase part of the supply chain. If a company needs to purchase a supplier or production facility, it may need to take on large amounts of debt to accomplish backward integration.
What are the risks associated with backward vertical integration?
Implementing backward integration can result in inefficiencies. By acquiring the supplier of raw materials required in the production process, the company will limit competition, resulting in
sluggishness and lack of innovation
. The company will be less motivated to spend money on research and development.
What is a disadvantage of vertical integration?
Disadvantages. The biggest disadvantage of vertical integration is
the expense
. Companies must invest a great deal of capital to set up or buy factories. They must then keep the plants running to maintain efficiency and profit margins.
What are the strategic advantages of a backward vertical integration strategy?
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 disadvantages of backward integration?
- It builds up excess upstream capacity to ensure that downstream has an adequate supply even when the demand is heavy. …
- The process leads to lack of supplier competition that will lead to low efficiency resulting in potentially higher costs.
What is an example of backward vertical integration?
Backward vertical integration involves
acquiring a business operating earlier in the supply chain
– e.g. a retailer buys a wholesaler, a brewer buys a hop farm. Another good example was Apple Inc. buying a chip supplier Dialog in 2018.
What are some reasons for backward integration?
Companies pursue backward integration when it is
expected to result in improved efficiency and cost savings
. For example, backward integration might cut transportation costs, improve profit margins, and make the firm more competitive.
Which of the following is a major benefit of vertical integration?
Vertical integration potentially offers the following advantages:
Reduce transportation costs if common ownership results in closer geographic proximity
. Improve supply chain coordination. Provide more opportunities to differentiate by means of increased control over inputs.
What are the risks and benefits to vertical integration?
Vertical integration requires a company’s direct ownership of suppliers, distributors, or retail locations to obtain greater control of its supply chain. The advantages can include greater efficiencies and reduced costs. The
disadvantages include a steep initial cost
.
When should vertical integration not be used?
One of the drawbacks to vertical integration is that the
strategy concentrates all the resources and prospects on the one approach
. The “all the eggs in one basket” strategy can be risky in an uncertain market environment. In addition, the organizational and coordination costs may also be high.
What is vertical integration pros and cons?
- Reduced Risk in the Supply Chain. …
- Reduced Costs. …
- Better Quality Control. …
- Lower Prices for Customers. …
- A Direct Link to the Market. …
- Advantages Over the Competition. …
- High Capital Requirements. …
- Risk of Increased Organisational Inefficiency.
Who is vertical integration used by?
Vertical Integration was first used in business practice when
Andrew Carnegie
used this practice to dominate the steel market with his company Carnegie Steel.
How did Apple use vertical integration?
Apple, as we say, is vertically integrated. …
Apple builds great hardware
, owns the core software experience, optimizes its software for that hardware, equips it with web services (iTunes and iCloud), and finally controls the selling experience through its own retail stores.
Which one of the following is not a potential advantage of backward vertical integration?
Which of the following is NOT a potential advantage of backward vertical integration?
Reduced business risk because
of controlling a bigger portion of the overall industry value chain.
What is the difference between backward and forward vertical integration?
In forward integration, the company acquires or merges with a distributor. In backward integration, the company acquires/merges with a supplier or manufacturer. In forward integration,
the company gains control over the distribution chain
. In backward integration, the company gains control over the supply chain.
What are intensive strategies?
Intensive strategies include.
Market Penetration, Market Development and Product Development
. Market Penetration is. implemented when an organization wants to increase its market share for the existing products or. services in the existing markets.
