Vertical integration in business refers to the process of gaining control over more steps of the product production stream. Whenever a business obtains or can greatly influence any one of these steps along the process of producing and selling a product, it is referred to as vertical integration.
Operational risks include overproduction, low quality construction/manufacturing, or opportunities for fraud due to the culture of the operation. Operational risks usually stem from the lack of internal controls or measurement tools in the production cycle. Many small business owners are overly optimistic in nature and therefore this optimism creates an environment of invincibility. The owner needs to allow input from staff and outside consultants to monitor his enthusiasm and reduce the risk associated with optimistic beliefs.
A third factor in determining a fair profit percentage is risk. Risk is divided into two types. The first is insurable and the second is uninsurable risks. Insurable risks are mitigated and have very little to no effect on the profit formula due to transferring the risk to a third party known as the insurance underwriter. Uninsurable risks are non-transferable and therefore the profit must be adjusted to compensate for this type of risk.