Vertical Integration is a term that is used to describe a strategy that many businesses use to increase their profits. Vertical integration happens when a company multiplies its production operations and potential into different stages of manufacturing on the same path, such as when a company owns its distributor and/or providers. Vertical integration is extremely useful in helping companies increase profits and helping them to improve their efficiency by decreasing costs such as transportation expenses and production time because time is a very valuable resource in industry. For example, if we consider a random solar power company and this company manufactures their own photovoltaic products plus fabricates the cells that are used to produce said products, this is an excellent portrayal of what a vertically integrated business looks like. In this case, the company had ownership of many products along the supply chain and assumed the manufacturing duties of them, thus conducting vertical integration.
Gregory (2017) writes about vertical integration within McDonald’s restaurant chain in his business management article written for the Panmore Institute. He shares the thought process behind McDonald’s strategic objective and firmly links it to the multitude of products and businesses in their own supply chain. The restaurant’s cost leadership program guarantees them a hefty market share in the low-cost fast food industry. For example, McDonald’s owns facilities that produce standardized mixtures of ingredients. Also, cost minimization is a financial strategic objective based on the cost leadership.
In addition, per Gregory, product innovation is related to McDonald’s broad differentiation generic strategy. This strategy involves minimizing costs to offer products at extremely low prices. As a low-cost provider, McDonald’s offers products that are relatively cheaper compared to other fast food chains. The company also uses broad differentiation as a secondary or supporting generic strategy. This secondary generic strategy involves developing the business and its products to make them distinct from all competitors. For example, “through McCafé products, McDonald’s applies the broad differentiation generic strategy” (Gregory, 2017). McDonald’s is one of the most famous companies using vertical integration to reduce its overall costs and increase profits. They own factories that produce mixtures of ingredients that they can then distribute to all their stores by McDonald’s trucks. By owning both the ingredient component and the distribution transportation units it is easier to get their product to their restaurants by lower costs. They no longer have to pay for shipping and for assembly. They also raise their own cattle and process the meat and they own agricultural industries which grow the potatoes for their French fries and their own vegetables for the hamburgers.
Unlike most restaurants who must barter and pay high prices for their own ingredients, McDonald’s is the source of their own food manufacturing. As further proof of vertical integration strategy, McDonalds also owns most of the land that their stores are placed on so they don’t have to deal with landlords or leasing costs. The use of vertical integration is why McDonald’s is one of the cheapest fast food joints in the world.
A strong example of a media company that utilizes the business strategy of vertical integration very well is Apple Inc. Ben Bajarin (2011) is the Director of Consumer Technology Analysis and Research at Creative Strategies, Inc., and he shares in his article about vertical integration at Apple Inc. in the digital website article for Time Magazine that almost no other company can compete with Apple industries because of the particular way they use vertical integration. He explains in his article that few companies have the right resources to compete directly with Apple as only a small amount of companies have the same structure Apple does.
Apple, Inc. is actually four diverse and thriving companies all wrapped up into one. It’s a hardware company, a software company, a services company, and a retail company. Most technology companies in the world can manage one or two of these disciplines, but only Apple has all four entities working in harmony (Barjarin, 2011).
Apple is one of the most vertically integrated companies due to its global marketing platform and international appeal. By owning and controlling most of its distribution stores, technology services and content providers, it controls the demand and market for the desired product. As well it controls the major, manufacturing houses and critical components of the production that are needed to make the products. This gives Apple Inc. an instrumental advantage over all other companies in the same industry. “In contrast, most other PC, smartphone and tablet vendors make the hardware (Dell, Toshiba, Motorola, Samsung, etc.), put someone else’s software on it (Windows and Android), add third party services (Google, carrier services, etc.) and then sell it through someone else’s store (Barjarin, 2011).”
It should be noted that vertical integration is a major strategy used by many different companies in many different industries today. One of the most obvious ways it occurs in daily life is through multi-media corporations who may own film production, channels and syndication networks. Laura Daws (2009) writes “The Telecommunications Act of 1996 paved the way for media corporations to obtain multiple holdings in both large and small markets, largely deregulating the media marketplace.” The main goal of creating this scholarly lesson plan with a hands on activity is to share with media educators how students may more easily discover for themselves how vertical integration works, especially as it relates to media. This lesson plan used in college courses explains that major media outlets can become embroiled in controversial social issues because when there are less voices in the media sphere, there is the larger impact on content distribution, sometimes negating important issues over others. This is especially true when controlled by the gatekeeper owners of mass-media. Her lesson plan theme seems to indicate that there may be both positive and negative effects in the world of mass media, if viewed in the extreme possible outcomes.
Vertical integration is a crucial way to obtain an upper hand in business profitability and perform above and beyond competitors. It also does a good job of cutting out the middle-man making production all the more efficient and inexpensive. When companies don’t have to reach out to other corporations in order to obtain goods and services it makes the production process simpler allowing them to make the most of their resources, whether that be making burgers or the world’s most popular cell phone.
Barjarin, B. (2011). Why competing with apple is so difficult. Time Magazine.com Retrieved December 05, 2017, from http://techland.time.com/2011/07/01/why-competing-with-apple-is-so-difficult/
Daws, L. B. (2009). Media monopoly: Understanding vertical and horizontal integration. Communication Teacher, 23(4), 148-152. doi:10.1080/17404620903218783
Gregory, L. (2017). McDonald’s generic strategy & intensive growth strategies. Panmore Institute. Retrieved December 05, 2017, from http://panmore.com/mcdonalds-generic-strategy-intensive-growth-strategies
Image Attribution: Image #1 “McDonlads” by Dennis Yang CC by 2.0; Image #2 “Apple Logo” by DigitalRalph CC by 2.0; Image #3 “Apple is Vertically Integrated” created by the author Mitchell Evans and used with his permission
Written by Mitchell Evans, 2017