Vertical Integration is when a company extends to a separate business adjacent in the value chain. It can be downstream to its customers business, or upstream to its suppliers business.
Vertical integration often looks like an attractive growth strategy. It is amazing how often the grass looks greener in someone else’s business, and it is appealing to argue that the company will get some synergy from it’s position in the adjacent value chain.
The downside is that:
1) The adjacent business is usually fundamentally different from the companies core business, with different Key success Factors, Business Model and culture needed to thrive
2) You become a competitor to either your suppliers or your customers. The former is dangerous, the latter often terminal.
3) The synergies are illusory – most can be captured through value chain cooperation
When is it useful?
When they are looking for new growth strategies, vertical integration is one direction companies should consider.
Clothing brands into retail
Oil companies into refining and petrol stations
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