Question

Give an example of a firm that is significantly vertically integrated. How about one that is very disintegrated and reliant on outsourcing? A specific characteristics of these firms or industries that you think that can explain these patterns?

Answer 1

To give an example of vertically integrated firm, first of all we need to understand (along with its characteristics and features) what vertical integration actually is.

Vertical integration is the process through which a firm grows and expands their working operations.

And to expand their routine working operations, a firm uses two strategies (or we can say that vertical integration is further classified into Backward vertical integration and Forward vertical integration, and this classification of two types of vertical integration, is in layman sense, are the strategies using which the firms can grow and expand their share and size in the markets.

BACKWARD VERTICAL INTEGRATION : Under this, those firms are included which produce the inputs/materials for the companies to produce final goods/products.

FORWARD VERTICAL INTEGRATION : Whosoever uses, sells, trade (wholesale and retail) the final products manufactured by the company to the customers further comes under this type of integration.

Flowchart showing the Vertical Integration :

Factor Inputs/Raw Materials -> Required Component for the production of finished/final goods -> Final assembly of the finished/final goods, say, bottling, packaging and storage tasks. (These constitutes the upstream industries). All these tasks come under the Backward Vertical Integration. This kind of integration exists when the company grows backward on the way/verge of production into manufacturing, thereby meaning that the retailer directly buys the producer of their product.

Use of the final products or Trade (Wholesale or Retail) of the final products among the Customers [Trade -> Customer], together constitutes (or form) the downward industries. This Sales and Marketing Strategy of providing the final products into the market, basically to the customers, comes under the Forward Vertical Integration. And this kind of integration exists when the companies take a direct control over the distribution and supply chain of their products.

Vertically Integration basically means that the companies or firms own and have a control over their suppliers, distributors (mainly the wholesalers) and retailers and allow them to control their value or supply chain. And vertical integration helps the companies and firms, especially, by allowing them to control process, diminish costs and further improve efficiencies. In other words, Vertical Integration takes place when the companies and firms owns an excessively larger control over the steps of production involved in the formation and creation of that particular finished product. And we've already discussed in the flowchart that companies' process/strategy of sales and marketing start with the purchase of raw materials and factor inputs and ends with the sale of finished products to the customers requiring those finished products.

One example of a firm that is significantly vertical integrated is technology giant Apple (AAPL) which has large number of retailers and retail locations globally as well as well as the production/manufacturing facilities to sell their products all over the world. Apple also acquired a company known as AuthenTec in 2012 which makes a feature of the touch ID fingerprint sensor that further goes into its iPhones. Apple also opened a large laboratory in a renowned place Taiwan in 2015 for the research and development of new screen technologies like LCDs and OLEDs. The Apple company also has distributors and suppliers, that inclues Analog Devices, which further provides iPhones a feature of touchscreen controllers. The Company has also integrated forward. Apart from Best Buy and the other retailers which are carefully selected by Apple, its products are also sold at many of the company-owned locations/places. This strategy helps Apple to tightly control their distribution and sale to its customers.

An example of a firm that indicates a high vertical disintegration is Hollywood, which further consists of the firms which are expertised/specialising in their particular departments of performing certain tasks like the firms which edit the movies, the firms which gives special effects in making of the movies, the ones which make trailers, the ones which advertise, and so on. These firms are basically dependent on Outsourcing, thereby meaning, some of the business operations are given/contracted to external providers of the services that particular business required. And we already explained in the example of Hollywood how it is reliant on Outsourcing as Hollywood gives contracts of its business daily operations like of animation, applying special visual effects to their movies and trailers, and 3-D conversion, etc. to the other expertised firms. Outsourcing actually depends on the nature of activities to do in a particular business and accordingly, industry of specialisation. One basic reason to vertically disintegrate is to share risks among different firms. A significant and huge number of companies have highly disintegrated in order to become more competitive.

The specific characteristics of these firms or industries that I personally think can explain these patterns are : the Economies of Scale, increased differentiation, increased specialisation, focused on core competencies to achieve cost savings, enhance improved efficiencies (firms or industries performance) and competitiveness.