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.