2. MEANING
• Vertical integration is a strategy whereby a company owns or controls its
suppliers, distributors, or retail locations to control its value or supply chain.
• Vertical integration benefits companies by allowing them to control the
process, reduce costs, and improve efficiencies. However, vertical
integration has its disadvantages, including the significant amounts of
capital investment required.
• Businesses are always looking for methods to reduce costs and control the
quality of the products and services they provide. A company is able to
create a competitive advantage by integrating different stages of its
production process and supply chain into their business. This is called
vertical integration.
3. EXAMPLES OF VERTICAL INTEGRATION
Netflix is a prime example of vertical integration
whereby the company started as a DVD rental
company supplying film and TV content. The
company's executive management realized they could
generate more revenue by shifting to original content
creation.
Today, Netflix uses its distribution model to promote
their original content alongside films from major
studios.
4. Another example of vertical integration
A company that is vertically integrated is Target, which has its own store
brands and manufacturing plants. They create, distribute, and sell their
products—eliminating the need for outside entities such as
manufacturers, transportation, or other logistical necessities.
Manufacturers can also integrate vertically. Many footwear and apparel
companies have a flagship store that sells a wider range of their
products than are available from outside retailers. Many also have outlet
stores that sell last season's products at a discount.
6. ADVANTAGES
• A vertically integrated company can avoid supply disruption. By
controlling its own supply chain, it is more able to control and deal
with any supply problems itself.
• A company benefits by avoiding suppliers with market power.
These suppliers are able to dictate terms, pricing, and availability of
materials and supplies. When a company can circumvent suppliers
such as these, it is able to reduce costs and prevent production slow-
downs caused by negotiations or other aspects external to the
company.
7. • Vertical integration gives a company better economies of scale. Large
companies employ economies of scale when they are able to cut costs while
ramping up productions—they take advantage of their size. For example, a
company could lower the per-unit cost by buying in bulk or by reassigning
employees from failing ventures. Vertically integrated companies
eliminate overhead by consolidating management and streamlining
processes.
• Companies keep themselves informed on their competition. Retailers
know what is selling well. If a company was vertically integrated with a
retail store, manufacturing plant, and supply chain, they would be able to
create "knock-offs" of the most popular brand-name products. A knock-off
is a copy of a product—a similar product but company-branded with
company marketing messages and packaging. Only powerful retailers
can do this. Brand-name manufacturers can't afford to sue for copyright
infringement, as they would risk losing major distribution through a large
retailer.
8. • Lower pricing strategies can be used. A company that's vertically
integrated can transfer the cost savings they create to the consumer.
Examples include Best Buy, Walmart, and most national grocery store
brands.
9. DISADVANTAGES
• The biggest disadvantage of vertical integration is the
expense. Companies must invest a great deal of capital to set up or
buy factories. They must then keep the plants running to maintain
efficiency and profit margins.
• Vertical integration reduces a company's flexibility by forcing them
to follow trends in the segments they integrated. Suppose a company
acquired a retailer for their product and created an outlet store that
carried the old merchandise as well. That retailer's competition began
using a new technology which boosted their sales. The new parent
company would now need to acquire that technology to stay relevant
in that market.
10. • Another problem is the loss of focus. Running a successful retail
business, for example, requires a different set of skills than a profitable
factory. It's difficult to find a management team that's good at both.
Integration can cause management to focus less on their core
competencies, and more on the newly acquired assets.
• Culture class is an issue. It's also not likely that any company will
have a culture that supports both retail stores and factories. A
successful retailer attracts marketing and sales types. This type of
culture isn't responsive to the needs of factories and the clash can lead
to misunderstandings, conflict, and lost productivity.
11. CASE STUDY ON VERTICAL INTEGRATION
1. Source- Journal of Business Case Studies – July 2008
2. Title- A Case Series Of Today’s Vertical Integration
3. Authors- Steven R. Clinton, Robert Morris, Robert Gayle Marco
4. Year- July,2008
12. ABSTRACT OF CASE STUDY
In today’s business environment outsourcing attracts considerable
attention. The general rationale is that anything that is not a core
competency of the firm is a candidate for outsourcing. The touted
benefits are generally considered to be substantial cost savings, better
productivity and more strategic use of scarce resources within the firm.
In contrast, vertical integration has to some degree come to be viewed
somewhat negatively – the argument being that no single firm in today’s
competitive environment can possibly – or should – manage an
extended enterprise. But as this series of case studies show, some firms
are flourishing by going against prevailing logic and vertically
integrating their supply chains.
13. Conclusion of the case study according to me
While outsourcing is designed, in part, to safeguard and leverage scarce
resources, recent examples in the toy and pet food industries clearly
illustrate the risks associated with this practice. Damage to carefully
crafted firm reputations as well as the bottom line draw into question
how much outsourcing actually saves an organization. In contrast,
vertical integration and its extension of the firm’s reach is often
portrayed as the lumbering giant wasting shareholder wealth by
performing tasks that can be done – presumably – more efficiently
outside the firm. But as these cases illustrate there is still a place for
carefully considered vertical integration. Whether it be synergistic
applications of complementary software or innovations by front line
workers and engineers, vertical integration can still work in today’s
environment and boost the bottom line.
14. Benefits which I noticed after going through
the Case Study
1. Reduces transportation costs if common ownership results in closer
geographic proximity.
2. Improves supply chain coordination.
3. Provides more opportunity to differentiate by means of increased
ownership over inputs.
4. Captures upstream and downstream profit margins.
5. Gains access to downstream distribution channels that otherwise
would be inaccessible.
