Vertical Integration Essay
Vertical Integration Vertical Integration deals with the degree to which a firm owns its upstream suppliers and its downstream buyers. When a firm becomes vertically integrated it means that it has incorporated all the aspects of the supply chain including manufacturing, distribution, warehousing, and even retailing. Specifically there are two types of vertical integration, backwards and forward integration. Backward or upstream integration is when a firm takes command of a function that its suppliers previously managed.
For example if Dell were to buy Intel this would be an example of backward integration, because Dell uses the Intel processors in their computers. Forward integration on the other hand is just the opposite; it is when a firm moves downstream on the supply chain meaning they are now assuming the roles of the distributor and possible even retailer. An example of this would be if a milk company used a distribution company to get its bottles of milk to supermarkets all over the country, and then bought that distribution company. The example I chose for this strategy is FedEx and their push to vertically integrate forward by purchasing Kinko’s.
Kinko’s is a store for people to make photocopies, develop business reports (e. g. binding, portfolios, etc. ), create business cards, signs, banners, pretty much anything dealing with any type of document. FedEx saw an opportunity to integrate because all these people were going to Kinko’s making these documents and reports and then going to UPS or FedEx to have them delivered. Instead of going to another place to ship the documents, FedEx cut that out by turning Kinko’s into FedEx Kinko’s or what is now FedEx Office. When a customer printed their business reports he could send them out right away at one of the locations.
There are a lot of things that can go wrong when a firm decides to take on another aspect of the supply chain. All the costs associated with Kinko’s, printer supplies, paper, binding, salespeople, customer service, all have to be taken on by FedEx. Sometimes these costs that are incurred outweigh the benefits. Also FedEx may not be as efficient in marketing its retail services (those of Kinko) as well as Kinko’s does. They either have to retain Kinko’s staff and pay them or hire new people and train them to be efficient with all the machinery and tools.
Vertical Integration Essay
Andrew Carnegie, owner of the Carnegie Steel Company, used vertical integration, a system of related businesses in which a parent company owns its suppliers, to increase his businesses efficiency levels. Carnegie bought out the companies and suppliers that carried the raw materials and services he required for his business. He was able to control everything he needed, and make agreements with other companies to buy his steel. Using this method, he saved money and increased his profits.
The Walt Disney World Corporation also uses vertical integration, just as Carnegie had done. Walt Disney plans, produces, advertises, and distributes all their own products. These products are sold in stores all owned by Disney. What also adds to the use of vertical integration within this corporation would be the purchase of ABC. Through this acquisition, it was a way for Walt Disney to propagate some of its programs on its own.
Vertical integration affects society by creating less competition, it makes businesses’ profits increase and allows them to save money. There are many positive reasons for vertical integration, such as improving supply chain coordination and reduce transportation costs, but with that always comes the negatives. Due to the lack of supplier competition, there are potentially higher costs, and there is a lower opportunity to increase product variation.