In a corporate vertical marketing system, the firm will own manufacturing, wholesaling, and retailing operations (Solomon, 2011). This provides the firm with a large degree of control over all supply channels and generally means the marketing is more efficient because products do not move through third party systems. As an example, Amazon integrates wholesaling and retailing in its system while using transportation systems. This is slowly changing with the company now creating its own supply lines. The company may also benefit from more competitive pricing depending upon the market and the competition.
Disadvantages of Vertical Integration
Vertical integration is not without issues as firms often create more cost and make themselves less competitive depending upon the market in the areas of new distribution centers. If the market is highly competitive the cost of overhead may just increase cost of products.
Inefficiency is another large issue and this often occurs depending upon the market in terms of distribution. If the company has to establish longer supply chains this will mean more cost of transportation.
Competitive pricing is based almost exclusively on the demand for the product in new distribution areas and in low demand areas distribution cost increases, thus reducing competitiveness (Solomon, 2011).
It is important to understand that the vertical integration is only a wise choice if the markets can support the new system. A vertical integration could create a negative impact on the business if the market is too costly to enter. For this reason, market research would need to be conducted in the proposed areas of distribution.
Solomon, M.; Marshall, G.; Stuart, E. Marketing: Real People,Real Choices. Textbook. 7th edition. Pearson Prentice Hall. 2011. ISBN 978–0–13–217684–2