Advantages of Vertical Integration

ADVANTAGES OF VERTICAL INTEGRATION

It leads to reduction of transportation costs as the common ownership results in closer geographic proximity. The transaction costs can be controlled if a firm acquires the other firms in the vertical chain, then one division of the same company will transfer goods to other divisions. So, transaction costs in form of transport, cost of negotiation, cost of control etc. will be eliminated. The overall average cost of the firm will decrease because if the divisions are under same management control then there will be in house supply and departmental heads will determine the transfer price. An example could be pokarna granites limited. The company was established in 1991 as a partnership firm quarrying black galaxy granite in India. Transportation of granite to factories where they can be cut and polished is quite difficult. Since that time, the company has grown to a major quarrier and fabricator of stones from India and around the world. From the very beginning, the company has believed in vertical integration. They begin with the finest raw materials, invariably from their very own quarries, assuring consistent, high quality suppliers.