Vertical integration in a distribution channel places into focus the factors of cooperation such as the distribution of income among partners, the distribution of risk depending on the marketing functions and activities assumed, as well as margin increase through the cost reduction. The problem is to identify the model which is, from a theoretical point of view, based on gradation of integration and the retailers’ power. For efficient retail, it is necessary to adjust the retailer’s and the supplier’s distribution models, and this homogeneous structure represents a unique model of cooperation between the suppliers and the retailers, which will be discussed here. There are two basic functions that suppliers or mediators perform, them being the satisfaction of supply and demand. Other functions can be divided into the exchange of the market information, the presentation of suppliers to the market, technical back-up and help with product selling to the end user.
The development of retail with the purpose of forming the optimum cooperation among the participants in the distribution, places into focus the question what has to be improved, in what way the mutual cooperation should be modeled and in what way does a retailer influence the physical flow of the goods through the channel. There is a need for considering the mutual relationships among the distribution channel participants, i.e. the business subjects which distribute products and provide services with an emphasis on the cooperation of a retailer with other participants. The greater the income of the retailer, the greater their influence on the distribution channels and the greater their control over the flow of the goods and services, without taking the ownership of the channel. Retail management controls the suppliers, who, then, have to increase the level of their services, take over more marketing functions and activities, reduce the price and improve assortment in stores.
The structure of the Vertical Marketing System
The vertical marketing system is an inter-organizational structure which is based on contracts or trust, where each subject has a limited control over this mutual relationship. The purpose of the vertical marketing system is to connect, to a certain level, the marketing advantages of two or more separate organizational units which have different marketing interests and owners. The difference between the distribution channels are manifested in a different range of marketing functions, each with its own expenses, which especially come into focus if we are talking about outscoring marketing activities. If two or more levels of the distribution channel merge into one unit which is supervised and managed by a single managing structure, in that case we have vertical integration (Grossman & Hart,1986). These two authors link vertical integration with control and ownership. They also claim that in the case of vertical integration, we have the transfer of control over one’s assets to another subject, while the first subject still keeps the ownership over that assets.
The analysis of the distribution channel has shown that vertical, compared to traditional channels, have considerably greater dynamics, development opportunities and give a better background for a specialization of the marketing functions. With vertical marketing systems, we have a limited independence of the participants, and, under the pressure from the competition, ’looking down on the partners’ transforms into a closer relationship with the leader. The existence of traditional channels comes down to the benefits from a transaction and not from a cooperation which can be more profitable and advantageous in the long run. A vertical marketing channel provides a systematic view of the issue, which was not the case with conventional contracting in that they only dealt with the issue of the contact and the agreement between an end user and a supplier.
Vertical marketing channel is another descriptive, theoretical model of the distribution chain which, as opposed to the Porter’s theoretical model, emphasizes the role of the participant that would order and carry out the necessary functions. Verticalization stands for the process of unification of all the market levels within the channel, where each level is represented by independent business subjects which transfer their result to the next level that is closer to the consumer. What makes the vertical integration specific is the fact that the distribution of marketing activities is based on an agreement, on condition that all participants retain their identity and independence.
|Vertical Integration Model Factors.|
The performance of marketing functions in the channel depends on the following factors: costs, expected benefits and risks.The purpose of the above picture is to identify the connection of the verticalization of marketing functions in the channel with the limitations, in terms of costs, risks and benefits. The more flexible and looser the verticalization, the more bearing of the costs, the risk and more freedom will be transferred to the other negotiating party. The only phenomenon that can influence the distortion of a dotted line in Figure 1 is the moment of power within the channel. A powerful player puts the pressure on weaker suppliers in that he tries, through their resources, to achieve greater profit by reducing the risk and costs.
The influence of power on vertical marketing system models
The development in the channel manifests itself in the change of relationships within vertical integration, and this occurs if a retailer becomes the holder of a higher value margin in the market economy. The prerequisite for strengthening of a retailer’s position is, above all, the investment in financial assets. This investment is a result of the strategic goals of management and ownership with the purpose of using the acquired means for gaining new resources which should secure higher value margin and the profit in the long run. From the economic point of view, the return to the invested amount means that the capital of a business subject has provided the profit, and is used rationally and economically. In addition, viewed from a broader perspective, we must notice the connection of this financial category with the model of vertical integration. The retailers that get return on the invested capital, make an efficient use of strategic resources, or, in other words, the managing structure integrates and classifies those resources and activities which are profitable and executable.
The comprehension of power refers to putting one party’s interests before the interests of the other, in which case the latter one is unable to change this. Theoretically speaking, power is manifested in the ability of a business subject to, through his behavior and activities influence the course of cooperation and the behavior of other participants whom he interacts with. Since the purpose of cooperation is to make a bigger profit for the organization and the participants, individual striving towards this additional profit that the organization would not otherwise achieve, is always present. The goals of inter-organizational cooperation are set through negotiation, so it is only natural to conclude that what we are dealing with here is the negotiating power or the ability to influence the outcome of the negotiation.
Negotiating power has a great influence on all aspects, from the modeling of the vertical marketing system to the very way of arrangement of the products on the shelves, and that power comes from the volume economy and the growth of the sales potential.The cooperation at the very end of the channel for the distribution of goods and services will probably, in the future time, be ever more controlled by a retailer, while the others, manufacturers and mediators will be forced to accept their rules. The key resources for selling the product to the end user will be, even to a greater extent, under the dominance and the management of retail.