In collaboration with Arkadi Khachaturian, Entrepreneur in Automotive Accessories Manufacturing.
This article examines the vertical integration strategy as a tool for building competitive advantage for small manufacturing enterprises. The aim of the study is to analyze and theoretically substantiate a model in which complete control over the value chain, from design to final production, enables small companies to compete effectively in the market. The objectives include examining the theoretical aspects of vertical integration, the resource-based approach, and their adaptation to small business conditions, as well as analyzing the practical benefits of this strategy. The paper demonstrates that this approach ensures superior product quality, accelerates innovation cycles, and increases strategic flexibility. The results of the study can be applied by entrepreneurs to build sustainable business models in niches where product design, quality, and uniqueness are key success factors.
Small and medium-sized manufacturing enterprises operate in highly competitive environments, where large corporations often dominate through economies of scale and low costs. In such a context, seeking alternative sources of competitive advantage becomes a condition for survival and growth for small businesses. One such source may be an atypical but effective strategy for small enterprises: vertical integration, which involves establishing control over multiple stages of the production and distribution chain.
The relevance of this study lies in the need to identify sustainable business models for small enterprises that allow them to create unique value for consumers. While outsourcing and specialization are dominant paradigms, the model of full control over processes—from product concept to physical production—remains insufficiently studied in the context of small business. The purpose of this article is to analyze how a vertical integration strategy focused on combining design and production functions enables small companies to create and maintain a competitive advantage.
Fundamentals of Vertical Integration
Vertical integration is defined as the extent to which a firm independently performs different stages of the production chain [1]. Traditionally, this strategy is associated with large corporations seeking to control raw material supplies or distribution channels to reduce costs and transactional risks. However, for small enterprises, the focus of the strategy shifts from cost savings through scale to achieving other types of advantages.
For small businesses, the value of vertical integration lies not so much in controlling suppliers as in creating synergy between the key stages of product development. The resource-based theory of the firm argues that long-term competitive advantage is based on unique, hard-to-replicate resources and competencies [3]. When a small firm integrates product development and manufacturing under its control, it creates exactly such a unique competence. This approach allows full quality control and enables complex design solutions that would be difficult or impossible to outsource [4].
Full-Control Model in a Small Manufacturing Enterprise
Consider the practical implementation of this strategy in a small enterprise starting with limited resources. Often, at the early stage, the founder simultaneously performs the roles of designer, engineer, purchaser, and production worker. While initially driven by limited resources for hiring staff or outsourcing, this model can be transformed into a deliberate strategy.
When the founder personally designs the product, creates templates and prototypes, and then launches small-scale production, an extremely short and efficient feedback loop emerges. Any design or technology flaws are immediately detected in production and can be corrected without bureaucratic delays or complex negotiations with external contractors. This creates a unique environment for iterative development and product refinement. Full control over the process ensures that the final product exactly matches the creator’s original vision—critically important for products where design and ergonomics are paramount.
Competitive Advantages Created by Full Control
The strategy of combining design and production within a single company provides three fundamental competitive advantages that are unavailable to firms using outsourcing:
Superior Product Quality. Direct control over each stage of production ensures consistently high quality [4]. A founder-designer personally involved in manufacturing will not compromise on standards that could diminish the product’s value in the consumer’s eyes. This builds a reputation as a reliable producer and strengthens customer loyalty.
Accelerated Innovation Cycle. Eliminating the need for formal documentation transfer, lengthy approvals, and contractor searches drastically reduces time from idea to finished product. Research confirms a direct link between R&D investment and growth rates for young firms [3]. In this case, the entire “design-to-production” process functions as a continuous R&D cycle, enabling rapid market introduction of new products and quick adaptation to changing consumer preferences.
High Strategic Flexibility. A company not bound by long-term contracts with external design or production service providers has greater freedom to change its product range, technologies, or even business model. This flexibility is crucial for survival and growth in the dynamic market environment faced by small enterprises [2].
Vertical integration in small manufacturing businesses represents a powerful strategy for creating and maintaining competitive advantage. Unlike large corporations that use it to control costs, small enterprises can leverage this model to achieve excellence in quality, innovation, and flexibility.
Full control over the “design-to-production” value chain creates unique competencies that make products difficult to replicate. Short feedback loops ensure high quality and rapid innovation, while operational independence provides strategic flexibility. This model is particularly effective in market niches where consumers value unique design, high quality, and rapid adaptation of products to their needs. For entrepreneurs with deep expertise in their product, a vertical integration strategy can form the foundation for building a successful and sustainable business.
References
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Storey D. J. Understanding the small business sector. London: Routledge, 1994. 384 p.
Stam E., Wennberg K. The roles of R&D in new firm growth // Small Business Economics. 2009. Vol. 33, № 1. P. 77–89.
Slack N., Brandon-Jones A., Johnston R. Operations Management. 8th ed. Harlow: Pearson Education Limited, 2016. 752 p.