Advantages and disadvantages of vertical merger?

Answer 1

Note: "integration" and "merger" are the same Benefits of Vertical integration

Vertical integration potentially offers the following advantages:

• Reduce transportation costs if common ownership results in closer geographic proximity.

• Improve supply chain coordination.

• Provide more opportunities to differentiate by means of increased control over inputs.

• Capture upstream or downstream profit margins.

• Increase entry barriers to potential competitors, for example, if the firm can gain sole access to a scarce resource.

• Gain access to downstream distribution channels that otherwise would be inaccessible.

• Facilitate investment in highly specialized assets in which upstream or downstream players may be reluctant to invest.

• Lead to expansion of core competencies.

Drawbacks of Vertical integration

While some of the benefits of vertical integration can be quite attractive to the firm, the drawbacks may negate any potential gains. Vertical integration potentially has the following disadvantages:

• Capacity balancing issues. For example, the firm may need to build excess upstream capacity to ensure that its downstream operations have sufficient supply under all demand conditions.

• Potentially higher costs due to low efficiencies resulting from lack of supplier competition.

• Decreased flexibility due to previous upstream or downstream investments. (Note however, that flexibility to coordinate vertically-related activities may increase.)

• Decreased ability to increase product variety if significant in-house development is required.

• Developing new core competencies may compromise existing competencies.

• Increased bureaucratic costs.