This is not new that a certain company tends to expand its production line into different areas especially when the manufacturer has some liabilities. Here comes the point when vertical integration plays role as its provide companies an edge in cutting down the extra costs and show efficiency by cutting down the expenses spend on transportation and reducing the duration of the work as well. Despite of the advantages of vertical integration, many times companies follow economies of scale and knowledge of the suppliers.
The vertical integration further involves three main aspects which are as follow:
1. Forward integration: it is a business strategy where operations are stretched to so that complete hold can be held by the business including the distribution of the products by their own transporters.
2. Backward integration: it is a business strategy that helps in cutting transportation costs and expenses, improves the profit margins and make the firm more competitive by making efficient use of the resources.
3. Balance integration: it is the strategy through which the vertical integration process is carefully managed so that the desired objective is achieved by the company.
Consider a frozen chicken patties manufacturer company X, which wants to integrate vertically. If they make the purchase of a farm along with a processing or operating plant, that means company X is integrating backward by controlling aspects like cost, quality and raw materials. If the company also handles the packaging of the products by purchasing such a plant than it holds hand on the distribution by buying a fleet of transporting trucks. This shows they have integrated forward. In order to manage all this including the cost, quality and quantity along with the production and distribution handling the X company will use balanced integration also.