Vertical integration is a strategic model that helps businesses increase market power and reduce costs (Williamson 1985); controlling the processes results in cost efficiency savings through the use of the value chain. Business dynamics play a definite role in vertical integration decisions. However, benefit realisation is heavily dependent upon business structure. Important factors such as demand, opposition and technical indecision all should be considered (Balakrishnan and Wernerfelt (1986); Harrigan (1986)). It is also worth noting that “Industry factors change over time. As a result, vertical integration strategies that were adopted in response to previous industry conditions may also change” (Mpoyi R, 2003). The synergy gained by an acquisition may not be as attractive in the future and may result in a sell off.
Our CESIM mobile phones business is able to design, manufacture, market, measure and add value to a product by paying for research and development. Theoretically this is a vertically aligned business, but as Mpoyi pointed out “Since a vertically integrated business segment has two businesses (the primary business and the secondary business), only the most important vertical link can be measured“(Mpoyi R, 2003). There is no reference point for this within CESIM, the limited environment does not allow you to see the synergies and savings that would exist within this model.
Theoretically we would benefit from:
• Removal of Obstacles e.g. no monitoring of contracts
• Tax relief and reduced regulations (Unfortunately CESIM doesn’t provide this, although this would benefit us if this real world)
• Economies of Scale
• Shared resources.
• Reduced Product Timescale
• Increased Differentiation, through increased input sources
• No investment from 3rd parties or stakeholders required
However, as Mpoyi R (2003) points out “… managers should consider vertical disintegration as a strategy to create or restore their company’s competitive advantage.” Failure to recognise this can result in loss of flexibility, decreased competition and reduced product diversification as well as higher cost, due to lack of supplier competition. Had we been able to, Horizontal Integration may have provided better opportunities for consolidation.