Challenges in Managing Vertical Integration
Vertical integration is a strategy that requires a lot of thought and effective management for its success. That is the reason why it provides some challenges even for a big company such as Ag feed. One of the problems that the company faced in the attempt to integrate vertically was the lack of professional experience. The firm between 2007 and 2008 acquired more than 25 hog farms in China (Lishan & Hui, 2013). The intention was to integrate these businesses so that they could operate as one and reduce the cost while still declaring Ag feed as one of the largest hog producers in China. The problem, however, was that out of the four founders, none had any prior experience in managing hog farms.
Further, the management team was also less competent when it came to the same. The lack of professional experience in a vertical integration means that there are higher risks of failure when it comes to coordinating supply chain activities. The inexperience in Agrifeed also led to a situation where the company would not tell the better option for them- a partial vertical integration or a full one. Before a company moves to integrate vertically, it has to consider its competencies and the effects that the integration may have on the company. It also has to consider the costs that come with these. In the case of Agri feed, the company lacked the professional experiences to analyze all these aspects, which may have been a challenge.
There was also the challenge of a volatile business environment. Vertical integration must take place in a more defined business environment. After the company made the acquisitions, the 2008 financial crises struck (Lishan & Hui, 2013). The share prices of the company plummeted, which was terrible for a company struggling with vertical integration and low margins to make ends meet. Vertical integration can be quite cost consuming. The company at this time, therefore, had to look for ways to stabilize the business and protect it from external economic factors while still ensuring vertical integration would work. This was quite a challenge for a new, vertically integrated company.
Additionally, vertical integration called for a need for larger chunks of land. This meant that there was a need for additional capital for land, which was a near impossibility during that particular period. There was also the limitation of access to land, which is still a concern up to date for Chinese hog companies. The land that is in existence is overexploited. This makes the available land high in costs that may be a challenge for any company that seeks to integrate vertically.
References
Lishan, Y., & Hui, T. (2013). Ag-Feed Industries Inc. From Reverse Merger To Reverse Of Fortune. Asia Business Case Center