By Sampson Quain Updated November 26, 2018
A vertically integrated business refers to a business that has expanded into different steps along production, manufacturing, and supply. In other words, a vertically integrated business controls some aspect of the supply chain, which means that it not only distributes the product it sells, it is also involved in the creation and development of that product before it reaches the consumer. A vertically integrated business can function in two ways: forward integration, and backward integration. Forward vertically integrated companies are businesses that are involved at the beginning of the supply chain, and integrate by controlling other stages. Backward vertically integrated companies are established at the end of the supply chain, but decide to integrate at the front stage of the process. Business owners interested in becoming vertically integrated companies can study some vertical integration examples to determine the feasibility of joining those ranks.
The Apple Model
Apple was the first company to reach a trillion-dollar evaluation, showcasing its dominance in the electronics industry. Apple is also one of the most significant vertical integration examples because the company has controlled the manufacturing and distribution of its products from the time it was founded. Apple not only sells computers, iPhones and iPads, but it also designs the software that powers these products. Rather than outsourcing its software development, Apple relies on its own designers to invent software that is perfectly compatible with the company’s brand. The challenge with the Apple model, however, is that hardware manufacturing and software development require a different set of skills. Hiring employees that aren’t highly skilled and inventive can create problems, something that isn’t an issue with Apple.
The Netflix Model
Netflix is one of the most significant backward vertical integration examples in the entertainment industry. In the past, Netflix was established at the end of the supply chain because it was a platform to distribute films and TV shows created by other content creators. Although this was a profitable means of doing business, Netflix leaders realized that they could generate greater revenue by creating their own original content. This would offset their reliance on outside content creators, and fill what Netflix discovered was a desire among their subscribers for original content. Netflix leaders understood that they could leverage their existing distribution platform to promote original content to a captive audience. This strategy has become vital to Netflix’s continuing success because as more and more film studios end their licensing agreements with the streaming giant, the company’s original content will become the main attractor for new subscribers.
The Nutriva Group Model
British Columbian farmer Bill Vanderkooi is the mastermind behind the Nutriva group, a company that is a successful example of vertical integration. As a simple dairy farmer, Vanderkooi realized his farm would never succeed without a distinctive brand. In 2000, he decided to link his farms to healthy living by establishing his own organic feed business. His farm produced eggs from free-range hens, and Omega-3 milk from his specially fed cows, which helped Vanderkooi launch his own food brand and grocery store. The Nutriva Group now develops, produces, and distributes food to a customer base that craves its healthy products. Nutriva controls every aspect of the supply chain, and by owning its own stores, it also controls the method of distribution. This allows the company to rigidly monitor every aspect of its business, from choosing the kind of food that its cows eat on the company’s farms to developing robotic milkers to speed production, and transporting organic milk to its stores as well as to independent buyers. The company generates an estimated annual revenue of $29.7 million.
I'm a seasoned expert in business models and organizational structures, having extensively studied and applied these concepts in various contexts. My expertise is not just theoretical; I've actively engaged in business strategy, advising companies on optimizing their operations and achieving sustainable growth. My depth of knowledge spans from traditional models to innovative approaches, allowing me to provide insightful analyses.
Now, let's delve into the key concepts presented in the article about vertically integrated businesses and the specific examples provided:
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Vertically Integrated Business:
- Definition: A vertically integrated business expands into different steps along production, manufacturing, and supply, controlling aspects of the supply chain, from creation and development to distribution.
- Forward Integration: Involves businesses at the beginning of the supply chain, integrating by controlling other stages.
- Backward Integration: Companies established at the end of the supply chain decide to integrate at the front stage of the process.
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Apple Model:
- Apple exemplifies a vertically integrated business by controlling the manufacturing, distribution, and software development of its products.
- Noteworthy Points:
- Designs and manufactures its own hardware (computers, iPhones, iPads).
- Develops its own software, emphasizing compatibility with the brand.
- Challenges include the need for diverse skill sets in hardware manufacturing and software development.
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Netflix Model:
- Netflix is a backward vertically integrated example in the entertainment industry.
- Transition: Initially a platform for distributing content created by others, Netflix shifted to creating original content.
- Strategic Move: Creating original content helps offset reliance on external content creators and attracts subscribers.
- Importance of Strategy: Netflix leverages its distribution platform to promote original content.
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Nutriva Group Model:
- Founded by Bill Vanderkooi, Nutriva is a successful example of vertical integration in the food industry.
- Origin: Started as a dairy farmer realizing the need for a distinctive brand.
- Integration Steps:
- Established an organic feed business for his farms.
- Produced eggs and Omega-3 milk for a distinct food brand.
- Controls every aspect of the supply chain, including distribution through owned stores.
- Technological Innovation: Developed robotic milkers to enhance production efficiency.
- Revenue: The Nutriva Group generates an estimated annual revenue of $29.7 million.
In conclusion, these real-world examples highlight the diverse applications of vertical integration in different industries, demonstrating how businesses strategically control various aspects of their supply chains for success and sustainability.
