Vertical Integration has existed since time immemorial. It is basically coming together of companies that operate in different stages of a supply chain process. For example, the Farm to Table trend is vertical integration of restaurants and local farms to bring healthy, organic (typically), and fresh food to its consumers. The ability to buy lights and bulbs from a local distributor in Canada rather than the manufacturer is an example of vertically integrated business model. In a more traditional sense, the way automobile providers build everything “themselves” is also an example of a vertically integrated business model.
The Vertical integration when done right can help each company to play to its core strength and better leverage each other.
Richard Branson and his Virgin Records company expanded from being a lone record store into talent management and production and was able to better manage the entire ecosystem and turn a loss making business into profit. There is numerous such smart vertical expansion. (source: Chron.com)
On the flip side, the one company (typically the upstream company) gets further away from the customer and downstream company (which is closest to the customer) may or may not have the maturity to help each other grow. Automobiles is a great example. Once a car leaves a shop floor into the distributors, the consumers engage with the distributors more and the feedback loop is lost. In addition, Automobile companies’ traditional penchant to do everything themselves means a bloated operating structure that is slow to move and respond to market condition making them ripe for disruption.
The Oil & Gas companies are yet another examples. By nature of business and by nature of trend, they owned the entire supply chain wing-to-wing (exploration to production to some aspects of distribution). While it got efficiency when businesses were on an all-time high, it also meant inability to sustain when the business is in a down cycle.
Digitalizing the vertical integration is helping businesses get the best of both. The trend is starting with the e-Commerce and the consumer business. Companies like Nasty Gal and ShoeDazzle use the digital as a means to integrate the entire supply chain (design, photography, build, and distribution) and bring it to the customers without the need for a store. In the process, set up a business model where everyone wins a share of revenue. In doing so, they also lead with the differentiator — data, digital, and consumers. This allows to build niche/personalized products that customers are willing to pay for. (Source: Tech Crunch)
While it is difficult for these companies to scale due to the nature of having to build and mature the supply chain at the same time, the larger companies with mature (sometimes defragmented supply chain) can expand into the digital realm in a sustainable way. Large companies like our own can get off the ground by doing the following:
- Clearly articulating and documenting the entire supply chain. From creation to distribution
- Identifying products/services/competitors in each and every area of supply chain
- Find opportunities to digitally capitalize by bringing them on to a common platform or an ecosystem
- Establish clear vision for short-term vs. long-term revenue play. Some short-term losses may be worth it for long-term data-driven differentiation
- MVP our way into it. The simplest place to start is by looking at the partner/channel ecosystem and expanding into others from there
Guess what — disruption occurs from many directions and for startups vertical integration is a way to start. Some of this is easier said than done and armchair reviews/write ups like these are decidedly useful to spawn a conversation of how do we best take a strategic approach to business model innovation via vertical integration.
How do you think your business can spawn new business models via Vertical Integration?
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