Making Smart Investments: An Introduction to Vertical Integration

TREEVANA, TREEVANA-MAGAZINE, MEDICAL-CANNABIS-MAGAZINE

By Staff Writer

Emerging markets offer the perfect opportunity for investment. When you stand at the forefront of a revolution, you are given the chance to make a potentially life-changing move before everybody starts hopping on board.

Unfortunately, these early stages are also the same time that risk is at its absolute highest. Without straightforward evidence that guarantees profitability, you need to rely on market research and predictions to make your decision.

There is always risk involved with investing (Virclics, 2013). This doesn’t mean that investments are a gamble, though. A smart investor does his research before actually handing over any of their resources.

Some markets are more promising than others – ergo, some industries are smarter to make an investment in. So, what exactly are the business predictions for the cannabis industry in 2020?

For starters, the legalization movement is not limited to U.S. soil. This global change is making the rapidly-growing market go international.

TREEVANA, TREEVANA-MAGAZINE, MEDICAL-CANNABIS-MAGAZINE

Investment opportunities will likely start springing up in other continents— especially those located in Europe. This expansion will likely continue as the industry begins to mature.

With market maturity comes the confidence of the impact that may (or may not) rise from progressive legislation.

It’s like this: you don’t want to invest in a company that is going to get targeted with millions of dollars in lawsuits. There were initial concerns about the impact of drug use and the chance legalization would be halted, but this doesn’t appear to be the case.

Now that people are seeing cannabis-friendly locations aren’t collapsing (Hudak, Res, & Rev, 2014), many more will be in favor of expansion and support— especially for clinical applications. 

As sales are projected to swell overall, many people are going to try to hop on board with the “green rush” before it dies down. This means you can expect to see many businesses (good and bad) trying to get their footing in this climate.

This translates to a lot of investment opportunities for people looking to get in on the enterprise. There will be a lot of entrepreneurs looking to impress you so that they can get resources for their ventures.

Making a theoretical plan sound promising is much easier than actually creating a company that will thrive. How can you tell who will sink or swim? Some experts believe the key to the cannabis industry lies in vertical integration.

Vertical integration is a trending buzzword that experienced investors are familiar with, but what is it, exactly?

This strategy promotes a high level of control where the company has a lot of influence over (or completely controls) the extra parties that it needs to work with to make the business run.

In general, this would refer to suppliers, distributors, and retail locations. In terms of the cannabis industry, this would be having your own chain of stores, agriculture facilities, and licensed distributors (or a strong enough power to hold significant influence over said entities).

Vertical integration is a great way for companies to reduce costs, maximize profits, enhance efficiency, and have an understanding of every step to preserve their image.

Just think about what can happen when a company can’t exercise a certain degree of control. They end up having to rely on other parties and can even become involved in unintentional scandals when third parties conduct shady practices.

When you look at the immense benefits that come with this business strategy, you may wonder why one would invest in anything else. Well, these strategies are not a guaranteed success, either.

This kind of venture is expensive and time-consuming. It is nearly impossible to be an expert in every field, so companies need to gather an experienced and reliable team (which any entrepreneur knows is easier said than done).

To top it all off, companies need to finance the venture from top to bottom. Some companies decide that it’s easier for them to focus on one aspect of the process. These one-track strategies don’t necessarily make for bad investments, either. 

In addition to money, there is a significant amount of responsibility associated with organizing a company’s operations. A business would need to find a way to divide their focus between the different sectors and communicate efficiently whilst still retaining the desired level of quality within the other sectors they’re involved in.

While this is all actionable information, the execution will require a lot of effort and organization. It will also require a lot of skill and synchronization (as well as money). A lot of funds mean that there is even more at stake for investors if the business fails.

Overall, there are advantages and disadvantages to both strategies. A company doesn’t need to be directly involved in every minor step to get successful. Similarly, a company can adopt this approach and fail. In fact, some companies do even better when adopting a hybrid strategy (Harrigan, 1984).

Opting for a balance between total ownership and strategic outsourcing can be an important move to consider (Rothaermel, Hitt, & Jobe, 2006). The best investments you can make are in companies that seem to have done their research.

There is plenty to consider when trying to make a smart investment in the cannabis industry. Promising predictions indicate it’s a booming market to get into— as they say, strike while the iron is hot.

You have plenty to gain as a pioneer in a new market before you need to worry about outperform long-established agencies.

Consider keeping these key things in mind and talking to an expert if you are serious about wanting to get into the game. Just remember— you are not the only one considering making this jump in 2020, and competition is sure to get fierce.

Citations

  1. Academy of management review
  2. A report on the state’s implementation of legalization
  3. Strategic management journal
  4. Procedia Economics and Finance