March 08, 2011 | Jacob Bylund and Adam Hertzke

Beyond Vertical Integration: Vertical Coordination As A Way To Capture Market Value

In the future, vertical coordination will consist of increasingly complex production, commodity marketing and licensing agreements.

Vertical integration in the food, agricultural and biofuels (FAB) industries has been a topic of much focus and discussion over the past several years. The increased use of vertical integration within the sector has often been seen, as a way for companies to increase value captured in a product and improve efficiencies in production, among numerous other reasons. However, due to the number of challenges faced by those engaged in vertical integration, more attention should be given to the idea of vertical coordination. Vertical coordination may be a path more appropriate for companies within the FAB industry to ensure they capture a return on their investment, while avoiding many of the concerns and challenges associated with vertical integration.

FAB industries are continuing to see advances in technology, development of specialized products, and numerous other scientific and technological developments. However, the growing cost of these technologies and advancements means that the companies making these investments need to ensure they capture a portion of the resulting economic value. This need to capture value is one of the reasons often cited as a need for vertical integration.

Before we take a closer look at the idea of vertical coordination, lets take a quick look at some of the challenges facing vertical integration in the FAB sector.

Vertical Integration

Vertical integration occurs when one company outright owns two or more stages of production. As one way for companies to seek greater economic value, there are both benefits and limitations to adopting this model in the FAB industries. Benefits cited for vertical integration include the ability to capture or retain a higher amount of the economic value of the product, increased control over product quality and consistency (helping meet consumer demand) and greater control over the timing of production (meaning the ability to greater adjust to the ebb and flow of market demand).

Over the past several years weve seen a number of companies making strategic decisions to move into other parts of the supply and production chains. While this does have benefits, as noted above, there are also limitations. Many of these relate back to the traditional role of independent producers and the various relationships these producers have with other players in the industry.

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