A:

Ideally, vertical integration is the preferred strategy for business growth and development, but in reality, the process is time-consuming, expensive and difficult to implement, making outsourcing a more favorable option in many situations. Companies with a reasonable amount of market power, operating in a stable economic marketplace, are usually better off outsourcing portions of their supply chains than attempting vertical integration.

Vertical integration is most practical when trade within the industry is not advantageous. In the steel industry, for example, steel makers typically produce the hot metal needed to make steel on site. Transporting the hot metal over a long distance would be inefficient and expensive. A computer manufacturer, on the other hand, can save money and increase quality by outsourcing the production of certain components.

The biggest challenge to vertical integration, especially for small and medium enterprises, is the cost of integrating. Over time, most companies save money and increase quality with vertical integration, but initially, the process requires a significant investment of resources. Businesses that choose to merge face legal fees and obligations, while companies that keep procedures in-house have startup expenses. Outsourcing is usually the best choice for young businesses that cannot afford the costs associated with vertical integration.

While vertical integration has a number of advantages, outsourcing can be a beneficial business strategy as well. Outsourcing allows companies to focus on the fundamental processes of daily operations and encourages international business and trade. Outsourcing typically carries less risk and a much lower initial investment, making it a preferred practice for most businesses in established, stable industries.

RELATED FAQS
  1. When is outsourcing a bad alternative to vertical integration?

    There are many things to examine when considering outsourcing versus vertical integration. One reason to not outsource is ... Read Answer >>
  2. Can Internet companies be vertically integrated?

    Find out how online businesses are beginning to take advantage of vertical integration for many of the same reasons as traditional ... Read Answer >>
  3. What are the legal barriers to vertical integration?

    Learn how embarking on a vertical integration through a merger is liable to run into legal barriers if the integration is ... Read Answer >>
  4. When does it makes sense for a company to pursue vertical integration?

    Discover how vertical integration allows firms to take more control over production costs, the quality of its products and ... Read Answer >>
  5. Is backward integration the same thing as vertical integration?

    Learn if there are any differences between backward integration and vertical integration. Learn where on the production line ... Read Answer >>
  6. What are the most famous instances of backward integration?

    Learn more about backward integration in the supply chain and see how two famous examples, Carnegie Steel and Apple, used ... Read Answer >>
Related Articles
  1. Small Business

    Times When Outsourcing Is A Good Fit For Your Company

    More and more companies are choosing to outsource. Here's a look at the costs and when it may be appropriate.
  2. Insights

    The Unintended Consequences of Outsourcing

    The outsourcing of labor overseas is a natural result of globalization of world markets and the drive for businesses to cut costs in order to maximize profits.
  3. Investing

    What's a Vertical Merger?

    A vertical merger occurs when two companies that produce goods or services for the same finished product merge operations.
  4. Tech

    Advisors Make More Outsourcing Investment Management

    Advisors who outsource investment management generate higher revenues than those who don't, a new study shows.
  5. Small Business

    Why Insourcing Is Appealing To Businesses In 2012

    With insourcing the latest trend in the employment market, we look at whether it is sustainable in such a stark economic climate.
  6. Small Business

    How to Outsource Work: 2 Tips for Business Owners

    Small business owner can increase efficiency and profits by outsourcing routine functions such as bookkeeping and payroll.
  7. Investing

    Understanding Vertical Analysis

    In vertical analysis, each line item on a company’s financial statements is presented as a percentage of a larger number.
  8. Insights

    4 Ways Outsourcing Damages Industry

    While outsourcing has preserved capital for many companies, it could be damaging to American industry.
  9. Managing Wealth

    Data Integrity Analyst: Job Description & Average Salary

    Learn about the average salary of a data integrity analyst and the required skills, education and previous experience needed to fill this role.
  10. Managing Wealth

    How to Make Time for What Matters Most to You

    Time is valuable, don't waste it by being unaccountable or by not outsourcing when possible.
RELATED TERMS
  1. Outsourcing

    Outsourcing is a practice used by different companies to reduce ...
  2. Vertical Integration

    When a company expands its business into areas that are at different ...
  3. Vertical Merger

    A merger between two companies producing different goods or services ...
  4. Vertical Market

    A group of companies that serve each other's specialized needs ...
  5. Backward Integration

    A form of vertical integration that involves the purchase of ...
  6. Vertical Line Charting

    A technique used by technical traders and market technicians ...
Hot Definitions
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  6. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
Trading Center