5.1.3 Where is vertical integration a good choice?

There are several strategies available to implement in your organisation, leading to better performance. In what context should vertical integration be considered?

Your organisation performs some market transactions with suppliers and with clients. If your organisation is placed in a country / region that has many regulations that you must follow in order to execute these market transactions, you might consider reducing such transactions by vertical integrating backwards or forwards. The same is valid if there are high taxes related to those market transactions.

Another similar factor can lead you to consider vertical integration for your firm. In order to execute market transactions, you may have to produce contracts with your suppliers and clients. Therefore, if many obstacles are posed to you in formulating and monitoring the contracts, either by national regulations or by the other contracting party, you should evaluate the hypothesis of not engaging with third parties, and produce it by yourself.

Sometimes it happens that one firm, your supplier or customer, is reluctant to make investments specific to the transactions with your organisation, investments that would represent a great asset to you. One possible way to overcome this problem is to make your own investment, meaning that you proceed to vertical integration of that specific task.

There is an obvious context in which vertical integration is quite favourable. If the consecutive activities of the value chain are strategically similar and if you integrate them vertically, that would probably lead to a decrease in costs.

EXERCISE: What could be your reasons to consider vertical integration in your enterprise?