The Concept of Vertical Integration evolves around the of how far or close a

business is from the source of raw materials or the final consumer of the product.

Vertical Integration – involves engaging in business activities to the level of

sourcies of supply or forward in the direction of final consumer.

Components of the vertical integration.

a.) Full integration- the firm internally makes 100% of its key supply of and
completely controls its distributors.

b.) Taper integration- a firm internally produces less than half of its own
requirements and buys the rest from outside supplies.

c.) Quasi-integration- company does make any of its key supplies but
purchases most of its requirements from outside suppliers that are under its
partial ownership or control.

d.) Long-term contracts- the company signs an agreement/ contract with

another firm providing agreed upon goods and services for a specified period
of time

2 options of vertical integration:

1. Forward vertical integration- another corporate option where the firm

engages in business activities in area of distribution and retailing of the
product or services directly to the costumers.

*Situation favoring forward integration.

a.)when an organizations presents distributors are especially expensive,or

unreliable,or incapable of meting the firms distribution needs.

b.)when the availability of quality distributors is so limited as to offer a

competitive advantage to these firms that integrate forward.

c.)when an organization competes in an industry that is growing and expected

to continue to grow markedly; this is a factor because forward integration
reduces an organizations ability to diversify if its basic industry falters;
d.)when an organization has both the capital and human resources needed to
manage the new business of distributing its own products;

e.)when the advantages of stable production are particularly high; this is a

consideration bacause an organization can increase the predictability of the
demands for its output through forward integration; and

f.)when the present distributors or retailers have high margins; this suggests
that a company profitability could distribute its own products and price them
more competitively by integrating forward.

2. Backward vertical integration- a corporate option to engage in the

business concentrating te efforts at the stage of raw materials production/
close to the source of raw materials.

*Condition favoring backward integration.

a.)when an organizations present suppliers are espically expensive, or

unreliable, or incapable on meeting the firms needs for
parts,components,assemblies or raw materials;

b.)when the numbers of suppliers is small and the number of competitors is

large;

c.)when the organization competes in an industry that is growing rapidly;

d.)when an organization has both capital and human resources to manage the
new business of supplying its own raw materials;

e.)when the advantages of stable prices are particularly important;

f.)when the present supplies have high profit margins,which suggest that the
business of supplying products or services in the given industry is a wortwhile
venture;and

g.)when an organization needs to acquire a needed resources quickly.