Supply chains are like the circulatory systems of the business world. They deliver essential components and raw materials to your business, and facilitate the transfer of finished goods to the market.
Unsurprisingly, then, an increased amount of control over your supply chain means that your entire organisation becomes more productive and efficient. Vertical integration is the primary strategy used by firms to achieve this.
Of course, venturing beyond your level on the supply chain can be very expensive; this is one of the reasons why vertical integration is considered a high-risk strategy. It remains a popular option for firms pursuing aggressive growth, though, and has proven hugely beneficial for many companies.
Successful Examples of Vertical Integration
The reasons for this can vary, but a general theme among each successful implementation is an abundance of resources for the company involved. To illustrate this, here are some notable examples that highlight how it can work:
1. Mobile Phones | Apple
With a broad portfolio of consumer devices requiring assembly, Apple is considered an industry leader in supply chain management. However, the main bulk of the company's integration is actually on the distribution and retail side of the equation, with the vast majority of Apple's sales coming through their self-branded stores.
There are over 500 of these locations around the world in more than 25 countries, and with distinct designs (including minimalist outlays and a heavy use of glass), these stores help Apple project an exclusive brand identity. When it comes to actual sales figures, the stores account for between 10% and 40% of total sales in various product categories, with the rest coming from a select list of retailers and other distribution partners, such as licensed resellers.
While forward integration comes relatively easily to Apple, the same cannot be said about integration at the supplier level. Apple is not a manufacturer of phones; they design their devices and then outsource the manufacturing to firms in China. Unlike their rival Samsung, Apple is not in a position to vertically integrate backwards; for instance, a single iPhone XI uses dozens of major components and many more minor ones, all of which are sourced from suppliers in Asia, Europe, and North America.
However, thanks to their unique products, extensive patents, and high consumer demand, Apple can dictate the terms along its supply chain in ways that other businesses simply can't.
2. Consumer Electronics | Samsung
The South Korean MNC is a more traditional example of both forward and backward vertical integration. Through its various divisions, Samsung is actively involved in the manufacture of various components, such as LCD and AMOLED displays, antennas, Li-ion batteries, camera modules, and semiconductors.
In fact, they are so dominant in some segments that even their direct rivals – including Apple – use Samsung as a supplier (both firms were also locked in a long-drawn-out court case over copyright infringement, which only highlights the advantage of vertical integration at the supply level).
Samsung uses a network of subsidiaries to maintain control over the backend of its supply chain. Upfront, meanwhile, Samsung-branded stores sell their products direct to customers offline. It has sales networks in over 70 countries that distribute the company's mobile phones, as well as other consumer electronic products such as televisions.
3. Oil, Gas and Energy | BP, Shell, and ExxonMobil
The fossil fuel industry as a whole is one giant case study of vertical integration along the entirety of the supply chain. Major corporations such as British Petroleum, ExxonMobil, and Shell are prime examples of this, and have a presence at all major levels.
It all starts with access to the raw material, which in this case would be crude oil. All companies have huge exploration divisions to find and secure new sources of this finite resource across the world, and invest vast sums of money in this regard.
Once an oilfield is secured, the next step is to build oil rigs in order to extract the material from the earth or the seabed. BP, Shell, and Chevron all have independent or part-owned subsidiaries involved in the production of crude oil.
The chain of vertical integration then extends further, and includes the transportation of crude oil for further processing at refineries. Through daughter companies, subsidiaries, and joint ventures, the major oil companies maintain tight control at this level.
Finally, each company then has a retail division to take care of marketing and sales of petrol, diesel, engine oils, and other related products and services. Some companies, such as Shell, even interact directly with invidivual customers through petrol stations across the world.
4. Automobiles | Toyota, Honda, Volkswagen, and Ford
Like oil companies, car manufacturers also have largely identical integration strategies. Unlike oil, however, backward integration is not particularly viable as, since cars have thousands of parts, they rely on numerous specialist suppliers.
On the sales and distribution side, though, it is a far more straightforward proposition. Major auto manufacturers such as Toyota, Honda, and Ford have global distribution channels; they export vehicles to numerous countries from several key manufacturing hubs.
Furthermore, these companies also handle all their own marketing and retail sales activities through branded showrooms. While the company may wholly own some of these, others are operated by third parties, often under a licensing or franchising system.
5. Media and Entertainment | Netflix and Disney
Online streaming giant Netflix is an excellent example of a brand that has incorporated high levels of vertical integration into its wider business strategy. In 2019 alone, it commissioned 371 different productions, with all of this content released exclusively on their online streaming platform.
Disney's story is not too different, either, although its vertical integration strategy is arguably more aggressive and diverse. In recent decades, it has acquired Hollywood movie studios, media companies, animation studios (including, famously, Pixar), and television channels, culminating in the creation of its new streaming platform, Disney+. Along with their own celebrated back catalogue of in house productions, the acquisitions of hugely profitable entertainment franchises such as Marvel Studios, Star Wars, and 21st Century Fox have created a lucrative base of products and intellectual property that not only drive its online streaming platforms, but its cinema releases and theme park tie-ins, too.
6. eCommerce | Amazon
Under the guidance of Jeff Bezos, vertical integration has proven a key strategy in the evolution of Amazon over the last two decades. In the beginning, it was just a digital store where buyers could place orders, but, as part of efforts to stay on top of rising demand, it soon ventured into warehousing, which is now a standalone service used by the company as well as its clients.
Amazon no longer relies on third-party delivery services, either, instead implementing its own logistics service provider (which is, again, used by all brands in the Amazon ecosystem). As well as stocking and selling other brands, the company has developed in-house brands in various categories, such as electronics (Amazon Kindle), household items (Alexa), and even clothing (Cable Stitch).
Given its enormous resources and ever-expanding portfolio, the company also has a history of creating new services for internal use before successfully selling the technology to others. Its web hosting and cloud computing divisions are an example of this, and mean that Amazon does not have to rely on external providers for crucial services for their core business.
What other successful vertical integration examples can business owners learn from? Join the conversation, and let us know in the comment section below.