Question

Many firms have vertically integrated their operations in pursuit of a sustainable competitive advantage. Give examples of successful and or failed efforts at vertical integration and offer your opinion regarding the reasons for those outcomes.

Answer 1

First of all vertical integration is when a company owns its supply chains. Eg : I am a car manufacturer. My job is only assembling the raw materials(steel,machines..etc) but not producing the raw materials itself. So if I Own production of the raw materials too, then it is my vertical integration. There is forward and backward vertical integrsation.Former is buying part of supplychain which is prior to one companies manufacturing product process and the later one is buying part of process after my manufacturing process. Eg : I am a milk seller(retailer).So If I own a cow then it is backward vertical integration and if I start an Icecream making unith, then it is a forward vertical integration.

Macdonald's is Successful in vertical integration. They are fast food chains and they are successful in producing their own rawmaterials like meat,egg..etc. Quaker oats is widely popular gatorade drink and once they acquired snapples, bottled teas and juices. But later they Quaker oates failed to run acquired snaplles and so;d it again for a huge loss. They basic problem was 'don't buy a business in which you don't know how to run it'.

Vertical integration has pros as well as cons. Pros are to get better efficient supply and gain economies of scale, To get incentives from government like ward off from extra taxes they might have faced if they bought raw materials from other firm, reducing transaction cost.Some negative are unbalanced growth , inefficiency due to lack of expertise and knowledge and the like.

In my opinion , always there is a cost andbenefits like we saw above and individual firms decide on this according to the situation and their on capabilities and calculated beliefs.