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Vertical Intergration Essay

930 words - 4 pages

According to a North American dictionary entry vertical integration is defined as “merging of companies in supply chain: the merging of companies that are in the chain of companies handling a single item from raw material production to retail sale” (“Vertical Integration,” 2009). Though the definition of vertical integration is quite simple the concept is much more complicated than one may think. There are four strategic factors that must be established by business leaders before the implementation of vertical integration can take place that must be well-thought-out in order to achieve any level of success. The factors that influence vertical integration are economic, market, operational, and strategic.
Economic Factors
Of the strategies used to implement vertical integration authors Meyer and Wang expressed their feelings about influential economic factors in the following quote:
“the most prominent pro-competitive effect of a vertical integration is the elimination of pre-merger double marginalization which arises when both the upstream and downstream markets exhibit some degree of economic market power, and thus firms at each level mark up their prices above marginal cost” (Meyer and Wang, 2011).
In addition to the pro-competitive economic effect some firms also experience what is known as a post-merger which is basically an incentive for a firm to raise downstream competitor costs by raising upstream market costs. Hence the increased price pressures the previously established downstream prices which cause conflict.
Market Factors
Some argue that it is imperative for a firm to conduct research and understand industry dynamics and market factors before any sort of vertical integration can be established. Lynne Haupt a graduate student attending Massachusetts Institute of Technology wrote a paper about vertical integration with regard to the Biopharmaceutical Industry and made the following statements about marketing factors that influence vertical integration.
“The market power that a firm can obtain or lose is an essential factor to consider in the vertical integration assessment. A firm should assess the entire industry dynamics to determine how reliable it is and then decide whether to vertically integrate. In order to understand the overall industry attractiveness, the firm should perform a Porter's Five Forces analysis on the industry… “(Haupt, 2005).

Operational Factors
Operational factors have everything to do with outward immediate appearance. For instance if the discussion focused on operational factors to consider when contemplating vertical integration in the fast food industry operational factors would include the appearance of the building where the service is being rendered, employee appearance and uniform cleanliness, customer service, and lastly the actual quality of food served. The thing about operational factors that is really scary is that the consumer has the upper hand because...

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