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VERTICAL INTEGRATION
This is when you buy a company that is not a direct competitor but rather a constituent in your supply chain -- such as a supplier or wholesaler or a retailer of your products or services. For Ford Motors, examples of vertical integration targets would be a car dealership or windshield-wiper supplier.
Advantages include the following:
- In some cases, this guarantees a market for your products.
- In some cases, this ensures your access to supplies or materials.
- By securing a reliable supply source, you can respond faster to market forces. Also, you can reduce the availability of supplies for your competitors.
Disadvantages include the following:
- Trying to run two types of companies can prove to be a difficult managerial task.
- Different types of companies often have divergent corporate cultures, which can hinder integration.
- You're locked into procuring supplies from your acquired company even though one of its competitors rolls out superior products.
Example: In vertical integration, a buyer doesn't necessarily have to purchase the whole company. Rather, it could buy a minority interest. This is what MGM did in February 2001, when it paid $825 million for a 20% share of Rainbow Media, which owns four cable channels: American Movie Classics, Bravo, Independent Film Channel, and We: Women's Entertainment. The deal allows MGM to better distribute its 4,000-plus films to the cable industry.
