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Vertical Integration: Controlling Multiple Steps Along the Supply Chain

Posted by Contributors on March 1, 2018

In the competitive world of ecommerce, every business strives to gain the edge, connecting customers with the innovative products and personalized services they demand as fast as possible. While organizations constantly develop new technology and processes to improve how they function, one of the most powerful strategies has many years of history behind it. Vertical integration is a time-tested means of seizing the competitive advantage by taking control of multiple steps along the supply chain.

If an organization has the resources to control the path that takes items from manufacturing to fulfillment, it's possible to reap tremendous savings while offering customers better service. A strategic approach and the right partnerships facilitate growth for even brand-new companies. With access to a robust supply chain and streamlined processes, ecommerce businesses can raise their profile in a crowded field.

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The Evolution of Vertical Integration

Vertical integration can occur in two directions. In forward integration, an organization at the beginning of the supply chain, such as a mining company, also handles later stages, like transportation or manufacturing. In backward integration, a business at the end of the supply chain, like a retailer, takes on earlier parts of the supply chain, such as by manufacturing its own products for sale.

As a corporate strategy, vertical integration can be traced back to the Gilded Age tycoons of the 19th century. Steel magnate and philanthropist Andrew Carnegie bought out the mines that produced the raw materials for his company, as well as the railways and steamships necessary for transportation. Carnegie Steel Corporation thus became the biggest company in its industry by 1889.

Carnegie's vertical integration strategy stood in contrast to the practices of someone like Standard Oil founder John D. Rockefeller, who engaged in horizontal integration. This approach means buying up competitors at the same stage in the supply chain. In this way, Rockefeller took control of about 90 percent of U.S. refineries in the 1880s. In the 1970s and '80s, the oil industry became one of the most visible examples of vertical integration, when several companies that were mainly engaged in oil extraction expanded into refinement and distribution.

Vertical integration is often costly, challenging and very difficult to reverse if things go wrong. However, pulling it off can be a major step forward for a company. According to McKinsey & Company, there have historically been several logical reasons for organizations to grow by acquiring businesses at other points in the production path:

  • Failures in the existing vertical market are causing excessive risk for the company.
  • Businesses in another part of the supply chain wield too much power over other organizations.
  • Enhanced market power allows a company to dictate favorable terms and command greater profits.
  • A developing or declining market leaves a business with a shortage of viable partners in particular stages of the supply chain.

Vertically integrated companies can take advantage of economies of scale, saving money by operating more efficiently and covering expenses at bulk rates. In turn, these businesses offer consumers lower prices than competitors. The chance to pull ahead of other organizations working at the same level of the supply chain continues to motivate leaders in a wide variety of industries.

How Tech Transformed the Supply Chain

While the essentials of vertical integration were laid out long ago, the strategy has undergone important developments over the years. Changing expectations from consumers, leaps forward in mobile devices and the fast-paced nature of online shopping have forced businesses to re-evaluate their strategies. Today, technology firms and ecommerce retailers are constantly on the lookout for new opportunities to make their supply chains more efficient and provide customers with seamless, reliable experiences.

Dell was a major pioneer in adapting the principles of vertical integration to fit the world of emerging technology. As founder Michael Dell explained to Harvard Business Review, the computer maker "virtually" integrated with the companies that supplied components, such as graphics cards. While Dell did not directly own these organizations, the company formed binding partnerships that allowed a steady supply of parts with minimal risk.

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Apple has fully embraced vertical integration over the years, moving both forward and backward along the supply chain. Since its beginnings as a computer manufacturer, the tech giant has grown to produce both hardware, such as the A-series processors for its mobile devices, and software, like iTunes and iCloud. In addition, Apple has its own retail stores offering both the latest products and the technical services to support them.

For organizations looking to make their name in ecommerce, Amazon is perhaps the most significant example of vertical integration. As a retailer that had its start in selling books and has since expanded into providing a seemingly endless range of products, the company took total control over the experience of online shopping and ecommerce fulfillment. From providing cloud hosting services to ensuring high-speed delivery of orders from its own warehousing facilities, Amazon demonstrates the tremendous power of integrating the supply chain.

Many retailers are interested in the advantages that come with eliminating silos in their processes and systems, as demonstrated by a 2017 survey of 500 North American retail organizations, from the consulting firm Boston Retail Partners. The study found that most of these companies are combining inventory management for multiple channels, implementing flexible models that shift with variations in consumer demand, and 65 percent are striving to meet the challenge of same-day delivery within the next two years. These businesses are making it a priority to integrate the systems they use for planning and allocation, but first they must move past the legacy technology that stands in the way.

Putting Vertical Integration to Work for Your Ecommerce Business

The vast majority of ecommerce organizations do not have the resources and influence of Amazon or Apple. However, that doesn't mean they can't seize the opportunities that come with vertical integration and the savings possible through economies of scale. The key is to enlist a partner with the capabilities to connect businesses with everything they need to succeed in online retail.

To establish a strong presence in a landscape dominated by vertically integrated powerhouses, organizations must have sites that perform at the highest level. That means putting together a top-notch ecommerce experience by implementing the latest technology. An ecommerce platform that combines a fully featured order management system with product information and warehouse management facilitates a smooth stream of data that is the backbone of any online business.

For an online retailer to drive conversions, it needs an ecommerce store that is not only functional, but appealing to view and utilize. A partner that employs data-driven strategy, market segmentation and personalization can attract the right consumers and usher them through a purchase. Holistic performance marketing, professional photography, beautiful design and an intuitive interface draw a visitor along the purchase path.

Warehousing and fulfillment can be one of the biggest headaches as a retailer grows. Thriving in the current online shopping environment requires globally connected, omnichannel operations. Companies should secure access to the warehousing facilities and scalable fulfillment processes that allow them to engage customers and meet their ever-increasing expectations for seamless ecommerce.

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Onestop Internet brings all these services together, putting the tools that power great commerce into the hands of retailers. Economies of scale make the difference between struggling to keep up and confident, sustainable growth in ecommerce. With a vertically integrated partner on their side, organizations can focus on the products and services they know best while reaping all the rewards that come with advanced, international operations.

Topics: onestopinternet, vertical integration, Ecommerce, Marketing, SEO, customer experience, fulfillment, supply chain

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