...Vertical integration is the expansion within a company to grow its business areas at different points along the same production and sales path. Vertical integration can help companies reduce their costs while improving efficiency and flexibility. Zara, founded in 1975 by Amancia Ortega, is the world’s largest fast fashion flagship chain retailer owned by Inditex Group and is vertically integrated in all aspects of its business. Zara, according to Ferdows et al (2002), has a decentralized communication and decision making process based on an autonomous ordering of clothing and fulfillment method. Zara’s vertically integrated structure of owning everything from the processes of manufacturing and design of its products to the individual stores is due to the fact they produce more of their products in-house, with only forty percent of its activities outsourced. The outsourced activities include the simpler labour intensive quick turnaround activities such as sewing and basic clothing designs while in-house activities are the more complex, complicated and trendy designs for their clothing. Zara’s top management’s opinion on the concept of most products produced in-house is it increases flexibility and speed as the products have a short cycle time. Zara also produces roughly half of its products within their own factories located in different regions around the world. Zara’s governance structure for gaining access to assets is continuous as they leverage their own assets, keeping their...
Words: 656 - Pages: 3
...farm in Costa Rica. You might ask: Why is Starbucks backward integrating? They probably do not think they can operate the supply chain more efficiently through vertical integration. They certainly aren't going to obtain a significant amount of coffee beans through one 600 acre farm. What are they doing? They are learning, experimenting, and innovating. It's a terrific reason to engage in partial/limited backward integration. Starbucks CEO Howard Schultz explained, "We are talking about doing innovative things we would not be able to do without this farm." Craig Russell, a Starbucks senior vice president, explained that the company would try to identify ways to address a fungus problem that is affecting coffee farm yields in Central America: "It's a dynamic situation and we will absolutely use this farm for testing different methodologies and ways to use new types of coffee trees we've developed that have become more diseaseand rust-resistant." Finally and most importantly, Starbucks intends to share what they learn about the fungus with other farmers, so that coffee bean production improves overall for the industry. This example demonstrates that a small bit of vertical integration (backward) can be very effective as a means of innovation and experimentation. Many companies simply view vertical integration from the perspective of its immediate effect on the bottom line. Ironically, many of those efforts actually decrease profits much to the chagrin of senior executives...
Words: 285 - Pages: 2
...Vertical Integration of Samsung Vertical Integration is a method of management control that is used by many companies. It is the process in which a single company controls or owns the distributors and the suppliers in the production of a product or service. This vertical integration is an important corporate strategy as it creates significant impact for the company in the regions of costs, differentiations, and other strategic issues. Vertical integration if applied right, can help company to reduce costs and improve efficiency by reducing transportation expenses and reducing turnaround time. Vertical integration is divided to backward integration and forward integration. Backward integration is when a company buys its suppliers, or set up its own facilities to manufacture supplies. Usually when a company buys a supplier, it is because of the products that are produced by supplier is performing very well and in great quality therefore create a good feedback from customers. It also reduces transportation costs, improve profit margin and make the company more competitive. Forward integration is where activities are expanded to include control of the direct distribution of its products. A company buys its own retail shops to distribute the products directly. With this way, the company can market its products directly to the hand of costumers rather than having to engage with other retailers. This can help company to achieve higher market share, better access to customers...
Words: 837 - Pages: 4
...Because he did not have to pay any middle men, Carnegie could aggressively cost his steel and still make a profit (Online Highways). With his lower prices, Carnegie began to slowly become a monopoly due to being the cheapest option in steel. American Apparel is an example of a modern day company that uses vertical integration. They start by knitting and dying fabrics, and continue all the way to public stores. Due to the lack of middlemen, they are able to cut production costs, and because they are entirely in the United States, they are able to cut shipping costs by not using foreign vendors (American Apparel. This supplies American’s with jobs rather than outsourcing to another country (American Apparel). People like the idea of supporting their country rather than a foreign one, so people tend to buy American-products (Economist), giving American Apparel an advantage over other companies. Vertical integration gives society more competitive prices, meaning the consumer saves money as well as the companies. Vertical integration creates more jobs, leading to more people being paid so more money is spent, helping everyone. The only disadvantage of vertical integration is how competitive the pricing is. If a local business has to compete with a big one that is vertically integrated, the small business will have to charge more due to more expenses in the middlemen (Economist). However, some people would rather buy things from a small merchant than a...
Words: 376 - Pages: 2
...Vertical Integration vs Outsourcing of Zara Written by Mohd Rahman October 04, 2014 “The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. That is the idea we still live by” -- Jose Maria Castellano Rios, Inditex CEO. 1 Introduction to Zara Zara is an icon in the fashion world and largest international fashion designing and manufacturing company. Zara is the flagship chain store of Inditex Group owned by Spanish tycoon Amancio Ortega, Inditex is one of the world's largest fashion retailers with eight brands and over 6,460 stores throughout the world (Ref-1). Headquarter of the group is in Coruña, Spain where the first store of Zara was launched in 1975. This paper will analyse the company and try to link its activities with supply chain strategy of vertical integration and outsourcing. Later will come to a conclusion that Zara is vertically integrated with justification and made recommendation for further improvement. Definition of Vertical Integration In strategic management, the term vertical integration describes a style of management control, when a company expands its business into areas at different points of the same production path. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or services, and the production combine to satisfy common need. In the following paragraph I will try to...
Words: 1736 - Pages: 7
...articles and academic journals approached various reasons and conclusions regarding whether vertical integration results in the most profitable application of a merger structure versus considering a horizontal or diversified integration approach. Hence, the topic surfaced during Satterlee’s (2018) comments relating to multinational corporations (MNC) and the three extensive types of MNCs concerning production, operations management, and functionality as the operational focus. Therefore, further research may reveal if one type of integration is more applicable when one considers a production merger or an operations style merger among the corporations considering these financial endeavors and...
Words: 1117 - Pages: 5
...STUDIES The Effects of Vertical Integration on Oil Company Performance Fernando Barrera-Rey Oxford Institute for Energy Studies WPM 21 October 1995 The contents of this paper are the author's sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members. Copyright 0 1995 Oxford Institute for Energy Studies All rights reserved. No palt of this publication may be reproduced, stored in a retrieval system, or transmitted in any fomi or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior pemiission of the Oxford Institute for Energy Studies. This publication is sold subject to the condition that it shall not, by way of trade or otherwise. be lent, resold, hired out, or otherwise circulated without the publisher's prior consent in any fonii of binding or cover other than that in which it is published and without D similar condition including this condition being imposed on the subsequent purchaser. ISBN 0 948061 90 1 ABSTRACT When asked to rank industries by their degree of vertical integration, most people would agree that the oil industry should come top of the list. Underlying this belief is the fact that integration and size tend to be closely associated. As the oil industry is so large and oil companies so visible and perceived as so profitable, the common belief is a correlation between vertical integration, size and performance. If...
Words: 11134 - Pages: 45
...Impact of Vertical Integration Table of Contents What is Vertical Integration?3 De Beers Summary3 Internal strengths of vertical integration5 External strengths of vertical integration6 Disadvantages of vertical integration7 Quad/Graphics and vertical integration7 Four types of Vertical Integration 7 Ownership and Breadth of De Beers 9 Conclusion 10 References11 What is Vertical Integration? Vertical integration is a powerful corporate strategy that when implemented under the right circumstances can work towards the organizations advantage. Vertical integration describes a firm's control over several or all of the production and or distribution steps involved in the creation of its product or service. This integration takes the assets that was owned by two organizations and combines it into a single business; this creates either a joint ownership, or the sale of one firm’s assets to another business. This strategy is more advantageous then contracting with an outside company since usually it creates lower operating costs and more control over quality of its products or services. Forward and backward integration in an organizations’ value chain is an attempt to strengthen a company’s business model. Although there are different forms of vertical integration, its main approach is either to expand operations backward into an industry that produces inputs for the company, or forward into an industry that distributes the company’s products. According to Harrigan...
Words: 2513 - Pages: 11
...In reviewing the facts presented to me it is my opinion, along with those of my colleagues at WIF Consulting, that your recommendation to horizontally expand the production of market pulp is the better decision when weighing it against the prospect of forward integrating into paper production. After doing an initial calculation, the net present value of the Valdivia project is roughly $3.7 billion (see Exhibit A), which yields a gain of almost $2.6 billion. Below are the key points we’ve identified to support this figure. Existing Competencies Within Arauco’s Contracted Workforce Because Arauco already has over 10,000 employees aiding in forestry and transportation operations under roughly 300 subcontracts, along with a workforce of independent workers operating all of Arauco’s sawmills, it becomes clear that several relationships are already being managed in order to ensure efficiency and effectiveness. By adding another workforce entirely dedicated to the production of paper, Arauco is taking on even more workers that are performing a series of operations that Arauco is not familiar with. Because of this, enforcement costs will be incurred to simply oversee the workforce’s numbers. Additionally, upper management will either need to be trained in a whole new set of competencies, or new employees must be taken on to optimize production performance. Additionally, to take full advantage of the potential sharing activities, will require an unknown amount of resources to...
Words: 1032 - Pages: 5
...1. Discuss the concept of vertical relations between firms and present a case study to illustrate it. This paper will be looking at vertical relations between companies, putting an emphasis on supply relations, vertical integration and hybrids, illustrating the theory with multiple examples in order to better explain the concepts. Vertical relations refer to a logical and natural association between two or more entities as well as their relevance to one another and the linkages in between. This concept can be easily transposed into the business world, as the interdependence amongst companies is a state of fact in the vast majority of cases. As a matter of fact, it is a general truth that companies only achieve self-sufficiency after integrating all links of the supply chain. Even so, there are still operations that need to be outsourced due to a wide variety of reasons (lack of certain competences/”know-how”, geographical restraints, financial feasibility, time concerns, etc.). More precisely, vertical relations refer to the rapport between two companies in the sequence along the value chain, where there can be one (or multiple) upstream company and multiple (or one) downstream companies. Although the typical characterization of the rapport between a company and the market is a direct one (where the firm sells directly to the end consumer), it is generally not the case. In the most familiar scenarios it is considered that the producer would retain...
Words: 5083 - Pages: 21
...retail location. Sales are typically made through one to one demonstrations and other personal contact arrangements. 2. How does it differ from traditional business models – e.g. Vertical Integration? In traditional business model like vertical integration, processes were vertically integrated with all the research, devel¬opment, manufacturing, and distribution capabilities in-house. This allowed for a high level of commu¬nication and ability to develop products based on the company's interaction with its clients. But in Direct business model organization treat suppliers and service providers as if they were inside the company. Their systems are linked in real time and their employees partici¬pate in design teams and product launches. Technol¬ogy enhances the economic incentives to collaborate because it makes it possible to share design databases and methodologies and speed the time to market. In this way it differs from traditional business model. 3. What are the advantages of direct business model from vertical integration? The advantages of direct business model from vertical integration are A.No high risk and costs of development and the ownership of assets in a volatile industry. B.Build good suppliers and customer relationship...
Words: 384 - Pages: 2
...Give recent examples of forward integration, backward integration, and horizontal integration. A business strategy that involves a form of vertical integration (upstream supplier and downstream buyers) whereby activities are expanded to contain control of the direct distribution of its products. The advantages of forward integration consist of excluding competing suppliers, greater capacity to reach end customers and better admittance to information about end customers. (Example) Forward integration is when a farmer offers his crops at the local market rather than to a distribution center. (Example 2) Dell reaches its customer directly through the internet this cuts out traditional computer stores. Backward integration is vertical integration that combines a core business with its suppliers. The advantages of backward integration may include assurance of the pricing, quality and availability of supplies, and efficiencies gained from coordinating production of supplies with their consumption. A form of vertical integration that involves the purchase of suppliers in order to reduce dependency. (Example) A bakery business bought a wheat farm in order to reduce the risk associated with the dependency on flour. (Example 2) Many grocery stores now have their own brand products to compete the name brand products (less expensive). When a company expands its business into different products that are similar to current lines. Horizontal integration is the widening of a business at...
Words: 838 - Pages: 4
...firms in a horizontally integrated (or focused) sector against those in more diversified businesses which are vertically integrated or conglomerates. In this report, I will be analysing and comparing how these integrations are being effectively deployed by various organisations in order to have the edge above their competitors in the sector. The second part of this report will focus on the clear definition of the types of business integration discussed as well as giving examples of each type. With the aim of using numerous examples and case studies, to show how these organisations are using the integration to gain more control and less competition in their sector. Horizontal Integration Horizontal Integration, according to Investopedia, this is defined as “When a company expands its business into different products that are similar to current lines”. However there are so many definitions to define horizontal integration but one thing all the definitions have in common is the coming together of two or more companies with the aim of becoming the dominant force in the sector and also generating more profit with less input compared to when these companies operate separately, but this is be done under single ownership and control. Another definition of horizontal integration is “the merger of companies at the same stage of production in the same or different sectors”. (Business Dictionary). If the end products of the merging companies are similar in a way, this can be referred...
Words: 2397 - Pages: 10
...FROM WHOLESALE TO RETAIL: IMPROVING THE FORWARD VERTICAL INTEGRATION STRATEGY AT FRESHMARK (PTY.) LTD. A dissertation by BARTHOLOMEW CHARLES BENECKE Submitted in partial fulfillment of the requirements for the degree MASTER’S DEGREE IN BUSINESS ADMINISTRATION (MBA) in the BUSINESS SCHOOL FACULTY OF MANAGEMENT SCIENCES TSHWANE UNIVERSITY OF TECHNOLOGY Supervisor: Prof. JA Watkins Co- Supervisor: V Naidoo May 2007 DECLARATION OF COPYRIGHT “I hereby declare that this dissertation submitted for the degree Master’s in Business Administration (MBA) at the Tshwane University of Technology, is my own original unaided work and has not previously been submitted to any other institution or higher education. I further declare that all sources cited are cited or quoted are indicated or acknowledged by means of a comprehensive list of references” BARTHOLOMEW CHARLES BENECKE Copyright© Tshwane University of Technology 2006 ii DEDICATION “This study is dedicated to my God, and King, to whom I give praise for all the gifts and strength He has granted me, and to my love Jasmyn, for her steadfast support through this time. I will love you both forever.” iii ACKNOWLEDGEMENTS I hereby wish to acknowledge the contribution of the following persons to the completion of this dissertation: ► To my parents for their love and support through all my years of study. Thank you for believing in me, even when I did not believe in myself. ► To Professor Watkins, for all his...
Words: 25854 - Pages: 104
...dominated the frozen food market in the 1950's and 1960's. They accounted for over 60% of frozen food sales in the UK. They served exclusively to over 40,000 retail outlets and among other outlets served; they accounted for over 75% of their frozen food sales. Problem Summary Birds Eye was losing its market share and profitability during the 1970's and 1980's due to increased competition in the frozen foods market. In 1978 their market share of 60% declined to 29%. Private label competitors had gained over 21% of the frozen food market. The increase of stiff competition drove prices down and lowered profitability for Birds Eye. A huge factor in loss of profitability and market stronghold was their internal strategy. The company’s vertical integration strategy worked for in the beginning to initially strengthen their brand, but lost its performance during the 1970's and 1980's. Due to the rising costs of producing frozen foods in the 1970's, and increasing market competition, the company needed to shift to a more horizontal strategic approach. Analysis Value Chain Birds Eye value chain was the chain of activates that it was operated on. The chain of activities gave them more value to its service and its products until early late 1960’s. The primary activities for Birds Eye were inbound logistics, operations, outbound logistics, marketing...
Words: 2104 - Pages: 9
