In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through customers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.
On FourWeekMBA, I discussed the Luxottica business model, which is a great example of vertical integration:
Luxottica controls the whole supply chain, which goes from product development to manufacturing, and logistics.
This helps it gain control over the quality of the final product, and connect its product development processes with the distribution and customer experience.
While this strategy is more expensive in the short-run, over the years can turn into a competitive advantage.
As the Luxottica case shows, the company grew and integrated more brands within its portfolio (iconic brands like Ray-Ban and Oakley are part of the Luxottica Group), by both having Luxottica-owned brands and by producing sunglasses for other major luxury brands.
By controlling the supply chain, and taking a step further in its retail strategy, Luxottica can connect the dots between product development and final customers to make sure quality and customer demand are aligned.
This process is used also in the digital world, by players like Google or other tech giants, that over the years have developed products and distributed them directly to customers to gain control over the whole supply chain.
Google vertical integration explained
Google (now Alphabet) primarily makes money through advertising. The Google search engine, while free, is monetized with paid advertising. In 2023, Alphabet generated over $175B from Google search, $31.51B billion from the Network members (Adsense and AdMob), $31.31B billion from YouTube Ads, $33B from Google Cloud, and $34.69B billion from other sources (Google Play, Hardware devices, and other services). And $1.53B from its other bets.
In early 2018, Sundar Pichai, Google’s CEO, highlighted how AI for humanity is more important and profound than what fire was.
To keep using an analogy, the real fuel that keeps the AI fire going is data.
Indeed when we go from atoms to bits, the strategic thinking behind an organization changes.
For instance, for a traditional company, one of the long-term success of the organization is based on keeping control of its processes and being able to control the whole supply chain.
While this strategy is expensive, it is also what drives sustainable growth. For instance, traditional companies operating in “slower” sectors (think of Luxottica in the eyewear industry) managed to gain control over the supply chain and also became the world’s leaders in their markets.
In short, the idea is that the closer you get to the customer (in case you’re a manufacturer) or the closer you get to the producer of a good or service (if you’re a retailer) the more control you have over the whole experience.
This, in turn, might allow you to dominate your industry over time and keep tight control over processes, quality, and operations:
While this is intuitive in the world of atoms. It gets a bit trickier in the bits world.
For the sake of understanding how vertical integration and supply chain work in the bits world, we’ll look at how Google is going up – or down (depending on where you look) in the supply chain of data.
Atoms vs. bits
As the web has become so ingrained in the way we interact with the world and with each other, it is easy to forget between companies that operate purely in the atom world, compared to that operating in the bits world.
Just to keep a clear distinction a business based on bits is mostly a software business or any organization that makes money primarily by selling digital goods or services, compared to a traditional atoms business.
It is important to remark that bits businesses are not entirely so, as they rely on massive physical infrastructure (think of Google data centers) which allow the company to operate.
However, a bits company’s mission is to provide goods or services, often at scale.
Where in the world of atoms, a key ingredient for an organization’s success is made of raw materials.
In the bits world, that raw material is even more critical.
That is the crucial ingredient for their success, and the raw material in the bits world is data.
Google and the supply chain of data
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distribution to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.
Before understanding vertical integration in the bits world, made primarily of data it is critical to understand how it flows to realize how tech companies are trying to gain control of it.
Often the supply chain of data needs to rely on the physical supply chain and vice versa.
Indeed, when you’re able to get your hardware in the hands of users that is the best it can happen if you run a company that makes money based on data it collects from its users.
The reason is that data is first quality data, and it carries a deep connection to the person using the device.
That move needs to be understood in terms of a supply chain of data.
A manufacturer in the real world starts to integrate its supply chain by getting control over the wholesale side and retail side until it can finally access its consumers.
On the other hand, the interesting part about data is that a consumer is also the producer of data.
Where the data collector goes up in the chain by manufacturing the device sold to consumers, those devices also become the producer of raw data.
That raw data gets assembled in multiple ways and sold to another side of the chain, which is the business willing to spend money on advertising.
Google business of collecting data
At its core, Google is a data collecting organization. Indeed, in search, Google is the best collector of users’ data to capture commercial intent sold as advertising.
Just as a quick reference from the research, one of the key findings highlighted:
Google learns a great deal about a user’s personal interests during even a single day of typical internet usage. In an example “day in the life” scenario, where a real user with a new Google account and an Android phone (with new SIM card) goes through her daily routine, Google collected data at numerous activity touchpoints, such as user location, routes taken, items purchased, and music listened to. Surprisingly, Google collected or inferred over two-thirds of the information through passive means. At the end of the day, Google identified user interests with remarkable accuracy.
This ability to identify users’ interests with “remarkable accuracy” comes from Google investments over the years in creating the proper infrastructure that could support its supply chain of data.
As voice search is approaching Google needs to be on top of the data game, and that explains the next run to dominate the voice assistants devices market.
From the search page to the voice assistant
When you type something on Google’s search box, you’re making its search engine better and better.
That is the power of network effects. In short, the more users keep using Google, the better its search engine can capture users’ commercial intent.
The traffic acquisition cost represents the expenses incurred by an internet company, like Google, to gain qualified traffic – on its pages – for monetization. Over the years, Google has been able to reduce its traffic acquisition costs and, in any case, to keep it stable. In 2023 Google spent 21.39% ($50.9 billion) of its total advertising revenues ($237.8 billion) to guarantee its traffic on several desktop and mobile devices across the web.
However, even though Google has a high gross margin, people still have to keep going back to its search pages.
Yet that data is precious it is still coming from third parties. Therefore, Google is investing massive resources to make sure that data can get acquired via its devices so that it can finally have control of the overall chain.
As I pointed out in Google’s hardware plansin January 2018, Google completed the agreement with HTC with the acquisition of the team of engineers and a non-exclusive license of intellectual property from HTC for $1.1 billion in cash.
Another example is how Google invested in KaiOS, an operating system, that transforms feature (dumb) phones into smartphones, providing them also of a default voice assistant (KaiOS phones use by default the Google Assistant).
That works as a window into the Indian market, where Google can access voice data, directly from those devices, thus bringing it closer to over a billion consumer base, that in the future might turn into a great business opportunity.
KaiOS is a mobile operating system built on the ashes of the discontinued Mozilla OS. Indeed, KaiOS has developed a robust standalone mobile operating system that turns feature phones (so-called “dumb phones”) into smartphone-like phones. As feature phones powered by KaiOS have access to mobile apps, connectivity, and voice search. KaiOS feature phone business model wants to bring connectivity and the digital revolution to those developing countries (like India and Africa) that have missed out on the smartphone wave due to too high costs of those devices. Besides, KaiOS might be well suited for the IoT revolution!
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.
For instance, in horizontal integration, the companies that take part in it, either merge or acquired the other (the same process can happen through vertical integration). However, in horizontal integration, this usually happens in the same industry and segment of the supply chain.
Therefore, imagine a wholesaler’s leader buying another leading company, to take a bigger chunk of the same market.
An example of horizontal integration might be the acquisition from Uber of Postmates.
Integrating Uber Eats with Postmates, will create a bigger player in the same market and segment of the supply chain (last-mile meal delivery).
Uber Eats is a three-sided marketplace connecting a driver, a restaurant owner, and a customer with the Uber Eats platform at the center. The three-sided marketplace moves around three players: Restaurants pay commission on the orders to Uber Eats; Customers pay the small delivery charges, and at times, cancellation fees; Drivers earn through making reliable deliveries on time.
An example, instead of vertical integration, in the bits world, as highlighted in Google’s data supply chain, the company is able to integrate its supply chain from upstream (in this case the upstream side starts with customers who become the sources of the raw data), to downstream.
Apple’s Vertical Integration case study
When Apple launched the iPhone, back in 2007, it was a moderately successful product.
Yet what really made it take off, was the combination of hardware, software, and marketplace.
In 2008 that was introduced as App Store, and that is when iPhone sales took off.
Combined with a strong distributionstrategy, the iPhone became a business platform, which enabled Apple to keep tight control over the ecosystem built on top of it, while generating revenues, ad high margins.
It costs Apple $501 to make an iPhone 14 Pro Max, and the company sells it at a base price of $1099. This makes Apple’s base markup on the latest iPhone model at 119% Apple is the only tech company able to sell its tech products at a such a premium, thanks to a combination of hardware, software and marketplace.
With that strategy, Apple mastered vertical integration, and it managed to keep control over its distribution, to create a trillion-dollar empire.
Apple has a business model that is divided into products and services. Apple generated over $383 billion in revenues in 2023, of which over $200 billion came from iPhone sales, $29.36 billion came from Mac sales, $39.84 billion came from accessories and wearables (AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch, and accessories), $28.3 billion came from iPad sales, and $85.2 billion came from services.By February 2024, Apple was worth nearly three trillion dollars. Apple generated over $200 billion from iPhone sales in 2023, which accounted for over 52% of its net sales—followed by services revenues at over $85.2 billion, wearables and accessories at over $39.84 billion, Mac sales at $29.36 billion, and iPad sales at over $28 billion.
Why Vertical Integration is a key competitive moat
By 2021, Facebook announced a complete rebrand, and it became Meta.
Why did Facebook, now called Meta, made such a move?
It’s possible to analyze this move according to vertical integration.
Indeed, there is a key distinction to make between Meta and other tech giants like Google or Apple.
Where Google and Apple have built vertical integration, thanks to the control over a whole ecosystem.
Facebook didn’t manage to build that, over the years. And as Apple tightened its App Store’s rules around privacy, that had the potential to crash the whole Facebook Business Model.
Thus, the Facebook move into the Metaverse wasn’t just a strategic move, it was a survival move.
And now Facebook (Meta) is trying to build the same kind of ecosystem and vertical integration that Apple and Google had built, which is what made them thick, in the long run.
Vertical integration examples in the physical world
Here are some more examples of vertical integration to solidify the concept.
Samsung
Across multiple divisions, Samsung takes an active role in the manufacture of components for use in the company’s various consumer electronics products.
These include camera modules, semiconductors, antennas, and LCDs.
Samsung’s vertical integration is so well established that rivals such as Apple sometimes use the company to source parts.
A network of subsidiaries maintains control over manufacturing, while forward integration is managed by branded stores that sell directly to consumers.
ExxonMobil, BP, and Shell
Oil companies are one of the best examples of vertical integration across the entire supply chain. ExxonMobil, British Petroleum (BP), and Shell have exploration divisions tasked with finding oil around the world.
Independent or part-owned subsidiaries then build the necessary infrastructure to extract it from the ground.
After extraction, these companies transport the crude oil to refineries. Control at this point in the supply chain is maintained via numerous other subsidiaries or joint ventures.
Each company also employs a retail division to market the refined product to customers – whether that be petroleum, diesel, engine oil, jet fuel, or asphalt.
Target
Target is a department store chain that has embraced vertical integration with open arms.
The company operates its own manufacturing plants and sells various store-owned brands to consumers so that it can control product creation and distribution.
In 2007, Target launched the RedCard – a branded credit card able to be used in the company’s retail stores and on its website.
The RedCard enables Target to control aspects of consumer financing and payment processing.
The card also gives the company access to consumer purchase behavior data that can be used to secure a competitive advantage.
Zara
Spanish clothing and accessory company Zara manages most of its supply chain from design, production, and distribution to marketing, sales, and customer support.
Like Target, Zara leverages this control to collect data on its customers which it then uses to make sales forecasts or guide product development.
Vertical integration also affords several other benefits for Zara. For one, it can maintain the quality of its products over time.
The supply chain itself is also more efficient since communications between the various Zara departments are more fluid.
Ferrero
Ferrero is a chocolate and confectionary company best known for its hazelnut-based spread Nutella.
Ferrero is a major buyer of hazelnuts on the world stage, acquiring 25% of the total supply.
Around 70% of that amount comes from Turkey, which made the company vulnerable to supply shortages in 2014 after heavy frost damaged crops.
To secure a stable supply of hazelnuts and ensure it would be protected from price rises, Ferrero vertically integrated by acquiring Oltan Gida – the worldwide leader in the procurement, processing, and marketing of hazelnuts with an annual turnover exceeding $500 million.
Vertical Integration Case Studies in the Tech World
Apple Inc.:
Description: Apple is known for its extensive vertical integration across hardware, software, and services. By controlling the entire ecosystem, from product design and manufacturing to retail and software development, Apple maintains tight control over the user experience and creates a seamless integration between its products and services.
Method: Apple designs its own hardware components, such as processors (e.g., A-series chips), displays, and cameras, giving it a competitive edge in terms of performance and innovation. The company also develops its own operating systems (iOS, macOS) and software applications (iWork, iLife) to provide a cohesive user experience across its devices.
Implication: Apple’s vertical integration strategy has helped it differentiate its products in the highly competitive tech market, drive customer loyalty, and capture a significant share of the premium segment. By tightly integrating hardware, software, and services, Apple delivers products that are highly functional, user-friendly, and desirable to consumers.
Google (Alphabet Inc.):
Description: Google, now part of Alphabet Inc., has pursued vertical integration primarily through its development of software platforms and services that span multiple industries, including search, advertising, cloud computing, and hardware.
Method: Google’s core search engine and advertising platforms form the foundation of its ecosystem, generating revenue and driving user engagement. The company has expanded into hardware with products like Pixel smartphones, Nest smart home devices, and Google Home speakers. Additionally, Google offers cloud computing services (Google Cloud Platform) to businesses, competing with industry leaders like Amazon Web Services (AWS) and Microsoft Azure.
Implication: Google’s vertical integration enables it to leverage its strengths in software, data analytics, and AI across multiple product categories. By offering a cohesive ecosystem of products and services, Google enhances user engagement, collects valuable data, and creates new revenue streams beyond its core advertising business.
Tesla, Inc.:
Description: Tesla is a pioneer in vertical integration within the automotive industry, producing electric vehicles (EVs), energy storage solutions, and solar products under one roof.
Method: Tesla controls all aspects of its supply chain, from battery production (Gigafactories) to vehicle manufacturing (e.g., Fremont factory). The company also develops its own software for vehicle autonomy (Autopilot) and over-the-air updates, providing continuous improvements and new features to customers remotely.
Implication: Tesla’s vertical integration strategy allows it to innovate rapidly, optimize performance, and maintain a competitive edge in the EV market. By controlling critical components like batteries and software, Tesla reduces dependency on suppliers, mitigates risks, and delivers a unique user experience to its customers.
Microsoft Corporation:
Description: Microsoft has pursued vertical integration by offering a wide range of products and services across software, hardware, and cloud computing.
Method: Microsoft develops and licenses its flagship operating system, Windows, and productivity software suite, Office. The company also manufactures hardware devices like Surface tablets, laptops, and Xbox gaming consoles. Additionally, Microsoft provides cloud computing services through its Azure platform, enabling businesses to build, deploy, and manage applications and services.
Implication: Microsoft’s vertical integration strategy enables it to offer a comprehensive ecosystem of products and services to consumers and businesses. By combining hardware, software, and cloud solutions, Microsoft creates value for customers and drives revenue growth across multiple business segments.
Amazon.com, Inc.:
Description: Amazon is known for its extensive vertical integration in e-commerce, cloud computing, logistics, and content creation.
Method: Amazon operates an end-to-end e-commerce platform, selling a wide range of products directly to consumers and providing fulfillment and delivery services through its extensive logistics network. The company also offers cloud computing services through Amazon Web Services (AWS), content streaming through Amazon Prime Video, and hardware devices like Kindle e-readers and Echo smart speakers.
Implication: Amazon’s vertical integration strategy allows it to control key aspects of the customer experience, from product discovery and purchase to delivery and support. By owning critical infrastructure and services, Amazon reduces dependency on third-party providers, improves operational efficiency, and enhances customer satisfaction.
Samsung Electronics Co., Ltd.:
Description: Samsung is a global leader in consumer electronics, semiconductor manufacturing, and telecommunications.
Method: Samsung vertically integrates across various stages of the electronics value chain, from semiconductor design and manufacturing to smartphone production and display technology. The company also develops software and services for its devices, including the Android-based One UI interface for smartphones and SmartThings platform for smart home devices.
Implication: Samsung’s vertical integration enables it to innovate across multiple product categories, differentiate its offerings, and capture market share in diverse industries. By controlling key components like processors, memory chips, and displays, Samsung maintains a competitive edge and drives technological advancements in the electronics market.
Key Highlights:
Vertical Integration in Business: Vertical integration refers to a business strategy where a company controls and owns multiple stages of its supply chain. This strategy allows for control over each step of the process, enhancing quality, coordination, and potentially leading to a competitive advantage.
Physical World Example – Luxottica: Luxottica, known for eyewear brands like Ray-Ban, exemplifies vertical integration by controlling its entire supply chain from product development to manufacturing and distribution. This strategy, although initially costly, can lead to competitive advantages in terms of quality and customer alignment.
Digital World Example – Google: Google’s vertical integration is showcased through its control of primary access points to collect data from consumers. By owning both hardware (devices) and software (services), Google captures data to refine algorithms, improve its services, and target advertising effectively.
Data as Raw Material: In the digital realm, data is the raw material that powers businesses. Similar to physical products, control over data’s collection, processing, and distribution can lead to a stronger competitive position.
Google’s Data Supply Chain: Google’s data supply chain is unique as it starts with consumers producing data. This data is then refined, processed, and stored, with the ultimate goal of enhancing user experiences and targeted advertising.
Google’s Hardware Integration: Google’s expansion into hardware, like smartphones and voice assistants, is not just about devices but also a strategy to control data collection at its source. This integration strengthens its data supply chain.
Apple’s Vertical Integration Success: Apple’s iPhone success is attributed to vertical integration, combining hardware, software, and ecosystem (App Store) control. This approach allowed Apple to maintain quality, innovation, and control over its distribution.
Facebook’s Move to Metaverse: Facebook’s rebrand as Meta and its shift towards the Metaverse is seen as a strategic response to its lack of vertical integration compared to rivals like Google and Apple. This move aims to establish an ecosystem and tighter integration for long-term growth.
Vertical Integration Examples:
Samsung: Vertically integrates by manufacturing components for its electronics, controlling production to sales.
ExxonMobil, BP, Shell: Oil companies vertically integrate across exploration, extraction, refining, and retailing.
Target: Manages manufacturing, sales, and customer financing to enhance control and data collection.
Zara: Controls its entire supply chain from design to distribution, benefiting from quality control and efficient communication.
Ferrero: Vertically integrates to secure key raw ingredients, as seen with its acquisition of Oltan Gida for hazelnuts.
Benefits of Vertical Integration: Vertical integration offers advantages such as quality control, improved coordination, cost efficiency, data collection, and potential competitive differentiation.
Company
Vertical Integration Type
Description
Advantages
Drawbacks
Apple Inc.
Backward Integration
Apple vertically integrates by manufacturing its own hardware components, such as processors and chips.
– High Capital Investment: Requires substantial capital for manufacturing facilities. – Risk of Over-Reliance: Vulnerable to supply chain disruptions. – Limited Supplier Flexibility: Reduces flexibility in sourcing components.
Tesla, Inc.
Both Forward and Backward Integration
Tesla manufactures electric vehicle components (batteries, motors) and sells directly to consumers through its own retail stores.
– Control Over Customer Experience: Provides a unique buying experience. – Cost Control: Reduces vehicle production costs. – Innovation: Allows rapid innovation in electric vehicle technology.
– Regulatory Challenges: Faces legal restrictions on direct sales in some states. – Capital Intensive: Requires substantial investments in manufacturing facilities. – Distribution Challenges: May have limited retail reach compared to traditional dealerships.
Amazon.com, Inc.
Forward Integration
Amazon operates its own logistics and delivery network to ship products directly to customers, reducing reliance on third-party carriers.
– Faster Delivery: Improves delivery speed and customer satisfaction. – Cost Reduction: Lowers shipping and logistics costs. – Market Control: Increases control over the e-commerce supply chain.
– High Capital Expenditure: Requires significant investments in logistics infrastructure. – Operational Complexities: Manages a vast logistics network. – Competitive Pressures: Faces competition from established shipping and logistics companies.
Ford Motor Company
Both Forward and Backward Integration
Ford manufactures its own vehicles and owns dealerships to sell them directly to consumers.
– Control Over Distribution: Ensures consistent brand experience at dealerships. – Cost Efficiency: Reduces distribution costs. – Brand Consistency: Maintains control over brand presentation.
– Capital Intensive: Requires investments in manufacturing plants and dealership networks. – Dealer Franchise Conflicts: May face tensions with independent dealerships. – Market Shifts: Vulnerable to changes in consumer preferences and economic conditions.
ExxonMobil
Backward Integration
ExxonMobil explores and produces oil and gas, processes it into various petroleum products, and operates its retail fuel stations.
– Supply Control: Secures access to crude oil and raw materials. – Profit Margins: Captures profits across the entire value chain. – Brand Consistency: Maintains uniform product quality at retail stations.
– Environmental Concerns: Faces scrutiny and regulations related to the oil and gas industry. – Market Volatility: Vulnerable to fluctuating oil prices. – Infrastructure Maintenance: Requires ongoing investment in refineries and retail outlets.
Netflix, Inc.
Forward Integration
Netflix started as a content distributor and later became a content producer, creating original series and movies.
– Content Control: Produces exclusive and original content. – Customer Loyalty: Builds a dedicated subscriber base. – Competitive Edge: Differentiates from other streaming platforms.
– High Production Costs: Invests significantly in content creation. – Content Risks: Some original content may not resonate with audiences. – Competition: Faces increasing competition from other streaming services.
Zara (Inditex)
Backward Integration
Zara, a fashion retailer, owns its manufacturing facilities and controls the entire production process, from design to distribution.
– Speed to Market: Enables rapid design-to-shelf cycle times. – Cost Efficiency: Reduces outsourcing costs. – Flexibility: Adjusts production to changing fashion trends.
– Inventory Management: Must manage large inventories in stores. – Capital Intensive: Requires investments in manufacturing and distribution. – Limited Outsourcing Benefits: Reduces cost-saving advantages of outsourcing.
Walt Disney Company
Forward Integration
Disney operates theme parks and resorts, allowing it to directly manage visitor experiences and revenue generation.
– Brand Control: Ensures consistent brand representation. – Revenue Diversification: Generates income from park admissions, merchandise, and entertainment. – Customer Engagement: Enhances customer interaction with Disney characters and stories.
– Capital Intensive: Requires investments in park infrastructure and maintenance. – Economic Sensitivity: Vulnerable to economic downturns affecting tourism. – Competition: Faces competition from other theme park operators.
AT&T Inc.
Backward Integration
AT&T, a telecommunications giant, owns and operates its own network infrastructure, including phone lines, cell towers, and data centers.
– Network Control: Ensures quality and reliability of services. – Cost Management: Reduces reliance on third-party providers. – Innovation: Drives advancements in telecommunications technology.
– Regulatory Scrutiny: Faces regulatory challenges due to its size and market power. – Infrastructure Maintenance: Requires ongoing investments in network infrastructure. – Competition: Faces competition from other telecom providers.
Starbucks Corporation
Forward Integration
Starbucks not only roasts its own coffee beans but also operates its own chain of coffee shops.
– Real Estate Costs: Must invest in store locations and leases. – Store Management: Requires operational expertise in running a large number of outlets. – Competitive Coffee Market: Faces competition from other coffee chains and local cafes.
UnitedHealth Group
Both Forward and Backward Integration
UnitedHealth Group offers health insurance and owns healthcare providers, such as Optum, to deliver healthcare services.
– Care Integration: Enhances coordination between insurance and care delivery. – Cost Control: Manages healthcare costs more effectively. – Revenue Diversification: Generates income from insurance premiums and healthcare services.
– Regulatory Complexities: Faces complex healthcare regulations. – Network Conflicts: Must manage potential conflicts of interest between insurance and care delivery. – Market Consolidation: May face anti-trust scrutiny due to vertical integration.
The Coca-Cola Company
Backward Integration
Coca-Cola owns bottling and distribution facilities, allowing it to control the production and distribution of its beverages.
– Quality Control: Ensures consistent product quality. – Distribution Efficiency: Streamlines product delivery. – Profit Margins: Captures profits across the supply chain.
– Capital Investment: Requires investments in bottling plants and distribution infrastructure. – Bottling Conflicts: May face conflicts with independent bottlers. – Market Shifts: Vulnerable to changes in consumer beverage preferences.
General Motors (GM)
Both Forward and Backward Integration
GM manufactures vehicles and also owns OnStar, a telematics and connected services provider for its vehicles.
– Vehicle Integration: Enhances vehicle connectivity and features. – Customer Engagement: Provides value-added services to vehicle owners. – Profit Margins: Captures revenue from vehicle sales and telematics services.
– Technology Investment: Requires continuous investment in telematics technology. – Market Competition: Faces competition from other telematics providers. – Vehicle Sales Challenges: Affected by market fluctuations in the automotive industry.
JBS S.A.
Both Forward and Backward Integration
JBS, a global meat processing company, owns cattle ranches, processing plants, and distribution channels, controlling the entire meat production chain.
– Supply Control: Secures access to raw materials (cattle). – Quality Assurance: Maintains product quality throughout the supply chain. – Cost Efficiency: Reduces costs through vertical integration.
– Environmental Concerns: Faces scrutiny for environmental impact of meat production. – Regulatory Challenges: Operates in a highly regulated industry. – Market Volatility: Affected by factors like disease outbreaks and market demand fluctuations.
The Boeing Company
Both Forward and Backward Integration
Boeing designs and manufactures aircraft and also offers aftermarket services, maintenance, and spare parts.
– Customer Relationships: Enhances relationships with airlines through aftermarket services. – Revenue Diversification: Generates income from aircraft sales and services. – Innovation: Drives advancements in aircraft technology.
– Competitive Aftermarket: Faces competition from independent maintenance providers. – Capital Intensive: Requires investments in aircraft manufacturing and services. – Market Fluctuations: Vulnerable to cyclical changes in the aviation industry.
CVS Health
Both Forward and Backward Integration
CVS operates pharmacies and owns Aetna, a health insurance provider, integrating pharmacy and healthcare services.
– Care Integration: Enhances coordination between pharmacy and healthcare services. – Revenue Diversification: Generates income from retail pharmacy and insurance premiums. – Cost Control: Manages healthcare costs more effectively.
– Regulatory Complexities: Faces complex healthcare regulations. – Network Conflicts: Must manage potential conflicts of interest between insurance and pharmacy services. – Market Consolidation: May face anti-trust scrutiny due to vertical integration.
Deere & Company
Backward Integration
Deere manufactures its own agricultural equipment, such as tractors and harvesters, to support the farming industry.
– Quality Control: Ensures reliable and durable agricultural machinery. – Brand Recognition: Maintains a strong brand presence in farming equipment. – Customer Loyalty: Builds loyalty among farmers.
– Capital Investment: Requires significant investments in manufacturing plants and research. – Market Dependence: Tied to the cyclical nature of the agriculture industry. – Competitive Landscape: Faces competition from other farm equipment manufacturers.
Intel Corporation
Backward Integration
Intel manufactures its own semiconductor chips for its computer processors, controlling a critical component of its products.
– Quality Control: Ensures high-quality and compatible chips. – Innovation: Drives advancements in semiconductor technology. – Cost Efficiency: Reduces component costs through internal manufacturing.
– Technological Challenges: Must keep up with rapid advancements in semiconductor technology. – Capital Intensive: Requires investments in semiconductor manufacturing facilities. – Market Competition: Faces competition from other semiconductor manufacturers.
Tyson Foods
Both Forward and Backward Integration
Tyson Foods, a meat processor, owns chicken farms and processing plants, controlling the supply chain from farm to table.
– Supply Control: Secures access to poultry and meat. – Quality Assurance: Maintains product quality throughout the supply chain. – Cost Efficiency: Reduces costs through vertical integration.
– Environmental Concerns: Faces scrutiny for environmental impact of meat production. – Regulatory Challenges: Operates in a highly regulated industry. – Market Volatility: Affected by factors like disease outbreaks and market demand fluctuations.
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distribution to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.
Distribution represents the set of tactics, deals, and strategies that enable a company to make a product and service easily reachable and reached by its potential customers. It also serves as the bridge between product and marketing to create a controlled journey of how potential customers perceive a product before buying it.
A distribution channel is the set of steps it takes for a product to get in the hands of the key customer or consumer. Distribution channels can be direct or indirect. Distribution can also be physical or digital, depending on the kind of business and industry.
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through customers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.
By definition, a horizontal market is a wider market, serving various customer types, needs and bringing to market various product lines. Or a product that indeed can serve various buyers across different verticals. Take the case of Google, as a search engine that can serve various verticals and industries (education, publishing, e-commerce, travel, and much more).
A vertical or vertical market usually refers to a business that services a specific niche or group of people in a market. In short, a vertical market is smaller by definition, and it serves a group of customers/products that can be identified as part of the same group. A search engine like Google is a horizontal player, while a travel engine like Airbnb is a vertical player.
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution, or value. A product approach takes existing alternatives and it offers only the most valuable part of that product. A distribution approach cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.
Psychosizing is a form of market analysis where the size of the market is guessed based on the targeted segments’ psychographics. In that respect, according to psychosizing analysis, we have five types of markets: microniches, niches, markets, vertical markets, and horizontal markets. Each will be shaped by the characteristics of the underlying main customer type.
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all, can produce products that customers want.
Reintermediation consists in the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.
As startups gain control of new markets. They expand in adjacent areas in disparate and different industries by coupling the new activities to benefits customers. Thus, even though the adjunct activities might see far from the core business model, they are tied to the way customers experience the whole business model.
The bullwhip effect describes the increasing fluctuations in inventory in response to changing consumer demand as one moves up the supply chain. Observing, analyzing, and understanding how the bullwhip effect influences the whole supply chain can unlock important insights into various parts of it.
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.
Consumer-to-manufacturer (C2M) is a model connecting manufacturers with consumers. The model removes logistics, inventory, sales, distribution, and other intermediaries enabling consumers to buy higher quality products at lower prices. C2M is useful in any scenario where the manufacturer can react to proven, consolidated, consumer-driven niche demand.
Transloading is the process of moving freight from one form of transportation to another as a shipment moves down the supply chain. Transloading facilities are staged areas where freight is swapped from one mode of transportation to another. This may be indoors or outdoors, depending on the transportation modes involved. Deconsolidation and reconsolidation are two key concepts in transloading, where larger freight units are broken down into smaller pieces and vice versa. These processes attract fees that a company pays to maintain the smooth operation of its supply chain and avoid per diem fees.
Break bulk is a form of shipping where cargo is bundled into bales, boxes, drums, or crates that must be loaded individually. Common break bulk items include wool, steel, cement, construction equipment, vehicles, and any other item that is oversized. While container shipping became more popular in the 1960s, break bulk shipping remains and offers several benefits. It tends to be more affordable since bulky items do not need to be disassembled. What’s more, break bulk carriers can call in at more ports than container ships.
Cross-docking is a procedure where goods are transferred from inbound to outbound transport without a company handling or storing those goods. Cross-docking methods include continuous, consolidation, and de-consolidation. There are also two types of cross-docking according to whether the customer is known or unknown before goods are distributed. Cross-docking has obvious benefits for virtually any industry, but it is especially useful in food and beverage, retail and eCommerce, and chemicals.
The Toyota Production System (TPS) is an early form of lean manufacturing created by auto-manufacturer Toyota. Created by the Toyota Motor Corporation in the 1940s and 50s, the Toyota Production System seeks to manufacture vehicles ordered by customers most quickly and efficiently possible.
Six Sigma is a data-driven approach and methodology for eliminating errors or defects in a product, service, or process. Six Sigma was developed by Motorola as a management approach based on quality fundamentals in the early 1980s. A decade later, it was popularized by General Electric who estimated that the methodology saved them $12 billion in the first five years of operation.
Scientific Management Theory was created by Frederick Winslow Taylor in 1911 as a means of encouraging industrial companies to switch to mass production. With a background in mechanical engineering, he applied engineering principles to workplace productivity on the factory floor. Scientific Management Theory seeks to find the most efficient way of performing a job in the workplace.
Poka-yoke is a Japanese quality control technique developed by former Toyota engineer Shigeo Shingo. Translated as “mistake-proofing”, poka-yoke aims to prevent defects in the manufacturing process that are the result of human error. Poka-yoke is a lean manufacturing technique that ensures that the right conditions exist before a step in the process is executed. This makes it a preventative form of quality control since errors are detected and then rectified before they occur.
A Gemba Walk is a fundamental component of lean management. It describes the personal observation of work to learn more about it. Gemba is a Japanese word that loosely translates as “the real place”, or in business, “the place where value is created”. The Gemba Walk as a concept was created by Taiichi Ohno, the father of the Toyota Production System of lean manufacturing. Ohno wanted to encourage management executives to leave their offices and see where the real work happened. This, he hoped, would build relationships between employees with vastly different skillsets and build trust.
Jidoka was first used in 1896 by Sakichi Toyoda, who invented a textile loom that would stop automatically when it encountered a defective thread. Jidoka is a Japanese term used in lean manufacturing. The term describes a scenario where machines cease operating without human intervention when a problem or defect is discovered.
The andon system alerts managerial, maintenance, or other staff of a production process problem. The alert itself can be activated manually with a button or pull cord, but it can also be activated automatically by production equipment. Most Andon boards utilize three colored lights similar to a traffic signal: green (no errors), yellow or amber (problem identified, or quality check needed), and red (production stopped due to unidentified issue).
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
