Talia owns the largest producer of ice cream in Easteros.
She currently relies on several small manufacturers to produce the packaging for her products.
She has contracts with each of her manufacturers and has quarterly meetings with them to discuss business for the next quarter.
Other than this interaction, she has little oversight over their work.
Over the last year, Talia’s business has boomed, and she is wondering whether she should begin packaging her product in-house.
Write a brief recommendation to Talia, highlighting the costs and benefits of vertical versus horizontal integration.
Your submission, excluding in-text citations and your list of references, may not exceed 350 words.
Talia, the company you work for is looking to expand its business and add new products to its portfolio. They’re considering either vertical integration or horizontal integration. Which option would be best for your organization?
Vertical Integration
Vertical integration is when a company buys or creates a subsidiary that is in the same business as its parent company.
This allows companies to control their costs, quality and supply chain.
Vertical integration can also allow companies to enter new markets by having access to resources already within the business.
Vertical integration is often used by large corporations with multiple divisions which need each other’s products; this way they can avoid having duplicate investments in different parts of their businesses (e.g., manufacturing).
Horizontal Integration
Horizontal integration is a process by which two or more companies combine their operations in order to increase efficiency and reduce costs.
This can be done through mergers, acquisitions, joint ventures or other forms of collaboration.
Vertical Integration: Horizontal Integration Benefits
- Greater control over production: Vertical integration allows for greater control over production because it allows one company to produce a product at a lower cost than would be possible if they were simply buying raw materials from another company that produces similar goods. This means you can save money on every purchase made by your business as well as use this money towards improving the quality of your products or services!
Costs, Benefits
The benefits of vertical integration are clear: you can buy materials and equipment in bulk, which lowers costs. You also have a larger market share with your suppliers and customers, which allows you to negotiate better deals.
The costs of vertical integration include:
- the cost of setting up an integrated supply chain (more on this later)
- the cost of creating new manufacturing facilities or changing existing ones to handle all your needs
In-House Production
If you’re interested in vertical integration, it’s important to consider the costs and benefits of your production model.
You may find that in-house production reduces costs by eliminating middlemen, who take a cut of any revenue you generate from wholesale products.
But on the other hand, if it takes too much time for your team to create new products or solve customer issues as they arise—and there are no outsourcing options available—you could end up facing shortages of certain items at certain times of year.
This could lead to lost sales opportunities because customers would be unable to receive what they need when they need them (or worse yet, not receive anything).
It’s also important to consider whether or not vertically integrated businesses have an advantage over their competitors when it comes down specifically because of their ability to produce everything needed within their facility instead having each step taken somewhere else (e.g., buying components from suppliers).
Should Talia vertically or horizontally integrate?
As you can see, there are a lot of factors to consider when deciding whether Talia should vertically or horizontally integrate. We’ve covered the costs and benefits of each approach in this brief review, but it may be helpful for you to read more about them before making your decision.
Vertical Integration:
The process of expanding a company’s operations so that it includes businesses producing goods or services used in the production of another good or service.
For example, if Talia were interested in entering into vertical integration with another company (and they were both interested), they could purchase the other company’s business and then continue operating as two separate companies—with Talia owning 100% ownership over both companies’ assets rather than being just 1/3rd owner as they would if they didn’t do anything at all!
Conclusion
In conclusion, Talia should choose vertical integration. It will allow for greater control over the production process, which represents key competitive advantages.
Horizontal integration might be more cost-effective in some cases but it could also lead to higher risks and complications if something goes wrong at one of the plants.
References