It is a well accepted fact that running a business is not easy. While it is nice to be in charge, it also has its demands. You have to make sure you are hiring the right people, doing background checks, have an sufficient inventory, and other things of that nature. People create businesses so they can make money, but more often than not, you will have to spend some money if you want to make money. Managing your budget and spending is a crucial aspect of being a business owner, so it would be wise to only pay for the things you absolutely need.
The concept of vertical integration is a great method to reduce spending, and also to up production, creating a total win-win scenario. Let us pretend for a moment that you, the reader, are the owner of a coffee shop. First, we must analyze the supply chain.
It starts with the farmers who grow the coffee plants and then harvest the beans. Those beans are then packed and shipped by a shipping company, followed by the beans being roasted in a roasting machine. Finally, the coffee is to be brewed and served to the customer. In some instances, a different business is carrying out each of those individual tasks. Let us say that you as the manager want to cut out the middleman and roast the beans yourself, that would be an example of vertical integration. Similarly, two companies within the same supply chain can join themselves together, creating the same effect.
This website here shows some real life examples of vertical integration. One company that it highlights is Amazon. Since Amazon sources, advertises, and sells products, they have effectively taken up three parts of the supply chain. Netflix is another great example. Netflix used to be a hub for your favorite movies, but only for the ones that had already been released in theaters. In 2013, Netflix began to produce its own original shows and movies, again proving an effective use of vertical integration.
Santa Clara University does a good job of highlighting the disadvantages of vertical integration. The most glaring downside to me was the fact that it is not always in the best financial interest to vertically integrate. This is due to the fact that it could potentially take a very large investment to buy and/or build new assets for integration.
In conclusion, to or to not vertically integrate is a choice that must be made by the business owner. If it is in your best interest to do so, meaning that it makes sense both practically and financially, then there is no reason to not do so. If that is not the case, and it would do your business more harm than good to vertically integrate, then I would recommend staying away from it. It's upsides are potentially very lucrative, but it's downsides are potentially the polar opposite
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