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Vertical Integration in the Supply Chain: Is it on the Rise? Ever since the early s supply chain organisations have taken on increasingly distributed structures, a shift from a long-standing tradition of vertical integration. Horizontal integration has become the go-to value chain strategy over the last two or three decades, to the point where companies that insisted upon remaining vertical became the outliers in a global field of distributed organisations.
Now it seems the trend may be reversing once more, as a definite movement—sometimes referred to as Vertical Integration 2.
Speed, Trust, Growth, and Control Supply chain speed is also making vertical integration VI attractive in other industries, but perhaps not to the same degree as in apparel retail.
Other issues appearing to influence the new VI trend include: Starbucks boasts ownership of all the following value chain assets and activities: This is a good example of how vertical integration does not always have to be achieved by asset ownership… but more on that later.
For Starbucks, vertical integration is a risk mitigation strategy. The company is now also moving into forward, as well as backward integration, having begun to open Nutella bars, where consumers can go to eat and drink everything Nutella.
Other Examples Bridgestone decided a few years ago to backward integrate and diversify into rubber production. The multinational tyre giant chose this path because its leaders believe that at some point, the demand for rubber will become so great that it will be too hard to get quality materials for tyre manufacture.
Armor Holdings makes armoured cars and bullet-proof vests. InArmor purchased a company that produces super-strength fibres used in the manufacture of bullet-proof materials. InDelta Airlines took ownership of an oil refinery that makes jet fuel. The list goes on, but the examples above should serve to stress the point that vertical integration is falling back into favour as an enterprise strategy.
Vertical Integration as a Power-play If the decision to integrate vertically proves to be the right one, the companies discussed above stand to gain plenty from providing coffee beans, high-strength fibres, raw rubber, hazelnuts, and petrochemicals at a price of their choosing, should these products really become scarce in the future.
In effect, what these companies all have in common is that they have integrated vertically in anticipation of a failure in their respective vertical markets. This is to some extent a speculative move, which is why it remains to be seen whether or not the decision to go vertical was correct.
Strangely enough though, there has been no shortage of companies taking the VI route for the wrong reasons, only to find that the results were not as positive as they might have expected. Aside from this general rule of thumb, think very carefully about setting off on the VI path with any of the following as a singular aim: To reduce risk for shareholders.
To secure supply or distribution assets in situations where the markets for either are efficient and there are plenty of parties with which to trade. To move closer to customers unless doing so will deliver high levels of economic surplus.
What Can Possibly Go Wrong? On the other hand though, there is plenty that can go wrong. To illustrate this, here are a few examples of traps that companies have fallen into after embarking on complex and expensive VI initiatives: All the while a company can contract with external service or product providers, strategic changes can be made with relative ease.
Not so once that same company has invested in supply chain assets and infrastructure of its own. Depending on how a vertically integrated brand is structured, there is a risk of customers becoming confused about who they are doing business with.
This is especially true if your company comprises subsidiaries operating in different parts of the supply chain.
Vertical integration can require truly massive investments in both financial and human capital. Plenty of companies have underestimated the enormity of a vertical merger and the requirements for facilities, labour, and knowledge acquisition.
The intellectual investment needed for vertical integration is considerable too. Your company may be entering into completely unfamiliar areas of supply chain operation. Some companies struggle to handle the increased operational scope, and hence fail to generate the potential supply chain control benefits.
The addition of new supply chain operations can draw attention away from those which previously formed the core of a business. This loss of focus can be damaging to the chemistry of the company and may even lead to customer attrition.
Other risks abound in vertical integration, relating to economies of scale or the lack of themdifficulties in entering new markets, and for larger companies, the possibility of intervention from anti-trust regulators. The important thing is to make sure the size of the prize really makes the abnormally high levels of risk and cost worthwhile.
If your company should get it wrong, you could easily find operational transaction costs increasing rather than decreasing and ultimately, be faced with the massive cost of disintegration.MBA Marketing Readymade Project Topics.
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