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Vertical integration is a business strategy where a company takes control of its supply chain^[1]. This means that a company owns different stages of production, from the raw materials to the final product, and sometimes even the sales^[2] process. This strategy is used to increase efficiency, secure supplies, and control markets. There are three types – backward, forward, and balanced integration. While there are benefits such as lower costs and increased profits, there are also challenges including high initial investment and potential conflicts of interest. Examples of successful vertical integration include companies like Apple, Amazon, and Tesla. This strategy can lead to increased market power and can disrupt traditional business models.

Terms definitions

1. ↑ supply chain. The main entity in this text is the Supply Chain. It is an essential process in business that entails the movement and conversion of raw materials into final products that reach consumers. This process involves multiple stages, including sourcing materials from suppliers, manufacturing products, distributing them through various channels, and selling them to customers. Managing this process efficiently, known as Supply Chain Management, is critical for businesses to save costs, improve customer satisfaction, and respond swiftly to market changes. It is also becoming increasingly important to consider social responsibility and security regulations in supply chain management. The supply chain process is subject to different types and models, and its performance and resilience are key factors for success. Technology adoption, sustainability, e-commerce, and data analytics are emerging trends in supply chains, while global uncertainties, balance between efficiency and responsiveness, transparency, cybersecurity, and skills gap pose significant challenges.

2. ↑ sales. Sales is a key aspect of business operations that pertains to the selling of goods or services at a defined cost. This process entails the transfer of ownership and agreement on a price. In countries with common law, sales are typically regulated by commercial codes. The individuals involved in executing sales are referred to as salespersons, who play a specialized role in the sales process. Sales is generally seen as the final stage of marketing, implementing the plan into action. It requires persuasion and effort to bring resources into a company. Sales are considered an output of a larger system within an organization, with the sales and marketing processes supplying inputs and outputs to each other. This process is often integrated within the larger business structure in large corporations, with multiple teams focusing on driving profits and success.

Glossary

Vertical integration (Wikipedia)

At microeconomics, management and international political economy, vertical integration is an arrangement in which the supply chain of a company is integrated and owned by that company. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need. It contrasts with horizontal integration, wherein a company produces several items that are related to one another. Vertical integration has also described management styles that bring large portions of the supply chain not only under a common ownership but also into one corporation (as in the 1920s when the Ford River Rouge Complex began making much of its own steel rather than buying it from suppliers).

Vertical integration can be desirable because it secures supplies needed by the firm to produce its product and the market needed to sell the product, but it can become undesirable when a firm's actions become anti-competitive and impede free competition in an open marketplace. Vertical integration is one method of avoiding the hold-up problem. A monopoly produced through vertical integration is called a vertical monopoly: vertical in a supply chain measures a firm's distance from the final consumers; for example, a firm that sells directly to the consumers has a vertical position of 0, a firm that supplies to this firm has a vertical position of 1, and so on.

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