Vertical integration is a strategy that involves expanding a business’s operations along the supply chain, either upstream (backward) or downstream (forward). Upstream activities are closer to the source of raw materials, while downstream activities are closer to the end customer.
Forward vertical integration is when a business acquires or merges with another business that operates later in the supply chain. For example, a manufacturer of shoes may acquire a retailer of shoes, or a publisher of books may acquire a bookstore chain. This way, the business can gain more control over the distribution and sales of its products and potentially increase its market share and profitability.
There are several benefits of forward vertical integration, such as:
- Reducing transaction costs and risks associated with dealing with external suppliers or distributors
- Improving coordination and communication between different stages of the supply chain
- Enhancing customer loyalty and satisfaction by providing better service and quality
- Creating entry barriers for competitors by securing access to scarce or exclusive resources or channels
- Capturing more value-added along the supply chain by eliminating intermediaries and their margins
However, forward vertical integration also has some drawbacks, such as:
- Increasing capital investment and operational complexity
- Reducing flexibility and responsiveness to changing market conditions and customer preferences
- Losing focus on core competencies and diluting the brand identity
- Facing legal and regulatory challenges due to antitrust or monopoly concerns
- Exposing the business to more risks and uncertainties associated with different stages of the supply chain
Therefore, before pursuing forward vertical integration, a business should carefully weigh the pros and cons and consider alternative strategies such as outsourcing, franchising, licensing, joint ventures, or strategic alliances. Forward vertical integration is not a one-size-fits-all solution but rather a context-specific decision that depends on various factors such as the industry structure, the competitive environment, the customer behaviour, and the business goals.