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Vertical Integration Example

By Madhuri ThakurMadhuri Thakur

Vertical Integration Example

Introduction to Vertical Integration Example

Companies across the globe look for expansion of their business to improve their business profitability and also to provide solutions to their customers in a far better way. When business activities are linked up and down the business system either backward towards suppliers or forwards towards the customer, such type of integration of the business is popularly referred to as Vertical Integration.

Let’s understand the same with the help of a few examples and the rationale behind such integration that propel companies to go for the same.

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Examples of Vertical Integration

Examples of Vertical Integration are as follows:

Vertical Integration – Example #1

  • One of the most prominent examples of the company with sustained success in Vertical Integration is the World’s leading smartphone maker Apple Inc. The NASDAQ listed company maker of the hugely popular Mobile Device I-phone has excelled vertical integration by doing backward integration by manufacturing the chipset used in its popular devices. By doing so the company has succeeded in keeping a check on quality and economizing its cost of chipsets which ultimately helps the company and its customers by providing quality products at better prices.
  • Similarly, the company has also done forward integration by opening its retail stores popularly known as Apple Stores to sell its entire product offering. By doing so the company is able to better save on the commissions that are to be paid to its retail partners, improve the uniformity aesthetics and style of its stores across the globe, and at the same time able to use them to provide better price points to its end users i.e. Customers. Thus we can see how a hugely successful company Apple Inc makes use of Vertical Integration to improve its business efficiency and business offering.

Vertical Integration – Example #2

  • Another popular example of Vertical Integration is McDonald’s. The globally famous fast-food chain is a master in the successful implementation of Vertical Integration. The company which operates its stores in nearly more than 100 countries around the globe selling Burgers, French Fries, Ice Cream and Beverages has ensured a successful backward integration of the complete supply chain. The company has set up its own manufacturing plants to procure the raw materials which are used for the preparation of its eatables.
  • Also, the company raises its own agricultural products to maintain the quality and ensure the same products are being offered to its customers across the globe. By doing such backward integration not just McDonald’s has achieved the fate of being a globally successful food chain brand but also delivers value for money to its loyal customer base across the globe.

Vertical Integration – Example #3

  • Another example of a successful Supermarket chain operating in developing nation India is Avenue Supermarts Limited which owns and operates the hugely popular stores DMART. The company operates in the Food and General Merchandise Industry which normally faces heavy margin pressure on account of the E-Commerce boom. Despite such a challenging situation, the company through successful implementation of both forward and backward Vertical Integration has delivered consistent returns both for its shareholders and for its customers.
  • The company normally operates in its owned stores which helps them to substantially save on rentals and also allow them to better customized their stores for better space utilization and improving the revenue per square feet, an important yardstick for players in organized retail. Further, the company has created its own in-house brands where the whole manufacturing and retailing is being taken care of by the company itself which helps them to better price the products and boost its profit margins.

Vertical Integration – Example #4

  • Another popular example of Vertical Integration and its successful implementation is the hugely popular globally renowned clothing brand ZARA. The Spain headquartered company has done successful backward integration and operates through its own large retail stores across the world. The company manufactures the merchandise in its own units and design also is done in-house. Due to such an integration the company is able to ensure a change of wardrobe and style based on season and has the fastest inventory turnover compared to its peers which enable the company to achieve superior profits and keep a competitive advantage in the clothing brand industry.
  • Vertical Integration is not just confined to companies in the Food and Clothing Industry. Another successful brand that has achieved remarkable success in Backward Vertical Integration is Luxottica the maker of popular brands in Optic wear such as Ray-Ban, Oakley, etc. The Italian company manufactures its own glass products, design the same and sell the same through its own operated stores and also in multi-brand stores. By doing such integration the company has substantially improved its market presence globally and also resulted in quality offerings to its customers.
  • However, it is pertinent to note here that not all Vertical Integration results in a successful stint. Sometimes if not well integrated can result in serious ramification for the company in question and can even to lead its existence in danger. Vertical Integration makes sense when the company can perform the functions in the value chain in a better and efficient way resulting in optimization of cost and improvement in overall efficiency and quality which are otherwise outsourced to external players. A business choosing to opt for vertical integration must ensure that they take into consideration such factors and should not get affected by short term gains arising out of forwarding or backward vertical integration but should see the long term story as well. The main point to remember while doing vertical integration is to ensure that those activities in the value chain are integrated which the business can perform more efficiently and economically which will result in a value accretive for the business and its customers.

Conclusion

Vertical Integration is an important milestone that companies try to attain to improve their profitability and achieve a superior edge over their competitors and differentiate themselves from them and at the same time delivering better value for the customers. This is an important step in enhancing the efficiency in the value chain. Through the examples of many successful, we have tried to enable the reader to appreciate the concept of Vertical Integration in a better way and also understand the nuances involved in making it a success for the company and a win-win situation for both the customer and the company.

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