A vertical integration is the union of two companies who come together in order to create a value chain that allows all parties to enjoy the benefits of business while sharing the costs and risks. A number of factors can be the motivation for entering into a vertical integration, such as costs of produced goods and services or the market differentiation associated with each partner. Choosing to enter into a working agreement of this type call allow both parties to enjoy a quicker service delivery with the distribution of a product, and thus increase the profit margin by generating additional sales.
There are several areas in which a vertical integration may be to the mutual benefit of both companies. One such area is the securing of raw materials for the production of the goods and services offered by each company. Together the two companies may enter into a joint effort of exploration and purchase of these materials. By conducting this task of search and recovery together, costs are kept to a minimum. This will result in a lower overall cost per produced unit, which means more profit at the point of sale for the supplier and possibly a discounted cost per unit for the buyer.
Another area in which a vertical integration may be mutually advantageous is in the distribution process for the end products. Both companies may be able to work together on securing retail outlets that will carry the goods produced by both entities. This can also allow the partners to save money on distribution costs such as transportation, as well as help both entities to break into retail markets that may have been closed to one or both companies in the past.
At its core, the vertical integration can be an excellent means of managing a higher level of profitability for both the supplier and the customer. By working together, it is possible for the supplier to incur less cost in the production process, and pass on part of the savings to the customer. At the same time, the customer works with the supplier to open up additional retail markets to the mutual benefit of both.
