00:00hello everyone welcome to business
00:04vertical integration is a strategy that
00:06allows a company to streamline its
00:08operations by taking direct ownership of
00:10various stages of its production process
00:12rather than relying on external
00:14contractors or suppliers
00:16a company may achieve vertical
00:18integration by acquiring or establishing
00:20its own suppliers manufacturers
00:22distributors or retail locations rather
00:25than outsourcing them
00:27in this video we will discuss the
00:29industry value chain major types of
00:31vertical integrations and the advantages
00:33and disadvantages of vertical
00:37part 1 industry value chain
00:40industry value chain refers to the full
00:42range of activities needed to create a
00:46for companies that produce goods the
00:48industry value chain comprises the steps
00:51that involve bringing a product from
00:52conception to distribution and
00:54everything in between such as producing
00:56raw materials manufacturing functions
00:59and marketing activities
01:01to explain the concept of vertical
01:03integration along the different stages
01:05of the industry value chain
01:06let us use cell phones as an example
01:09this ubiquitous device is result of a
01:12globally coordinated industry value
01:14chain made up of different products and
01:17first stage the raw materials to make
01:19your cell phones such as chemicals
01:21ceramics metals oil for plastic and so
01:24on are all commodities
01:26each of these commodity businesses are
01:28different companies such as dupont and
01:33second stage intermediate goods and
01:35components such as integrated circuits
01:38displays touch screens cameras and
01:40batteries provided by firms such as
01:42intel lg texas instruments and more
01:47third stage original equipment
01:49manufacturing firms also called oems
01:52such as foxconn typically assemble cell
01:54phones under contract for consumer
01:56electronics and telecommunications
01:58companies such as apple and samsung
02:01if you look closely at an iphone you
02:04will notice it says designed by apple in
02:06california assembled in china
02:09final stage to get wireless data and
02:11voice service customers need to pick a
02:13service provider such as at t sprint
02:19part two types of vertical integrations
02:23along the industry value chain there are
02:25varying degrees of vertical integrations
02:28generally there are two major types of
02:30vertical integrations
02:32backwards integration and forward
02:36backward integration
02:38a company that chooses backward
02:39integration moves the ownership control
02:41of its products to a point earlier in
02:43the value chain or the production
02:45for example amazon.com inc started as an
02:49online retailer of books that it
02:51purchased from established publishers
02:53and over time amazon became its own
02:57the company eventually branched out into
02:59thousands of branded products then it
03:01introduced its own private label amazon
03:03basics to sell directly to consumers
03:07ikea can be another example of backward
03:11ikea is known as a flat pack retailer
03:13that sells mostly wooden furniture but
03:15also other fixtures and fittings
03:18ikea is also last in the value chain as
03:20it directly sells to the final consumer
03:24in 2015 ikea made a huge step in
03:27ensuring complete vertical integration
03:29by purchasing a romanian forest
03:32the company added to this by purchasing
03:34forest land in alabama in 2018
03:38not only does it now control much of the
03:39raw material production but it also
03:42controls the manufacturing process
03:43through its subsidiary
03:45by completing these integrations ikea
03:48controls production of the wood the
03:49manufacturing process and the final
03:52distribution through its retail units
03:55second forward integration forward
03:58integration is another type of vertical
04:00integration where the company gains
04:01control of the business activities that
04:03are ahead in the value chain
04:05this is also known as cutting out the
04:08through forward integration
04:09manufacturers may skip the wholesalers
04:11or retailers in the value chain to sell
04:13directly to customers
04:15the company extends the next levels of
04:17the value chain in an effort to
04:19synergize the operations reduce total
04:22expenses and become closer to the end
04:25here are two real industry examples of
04:31apple had been plagued with a decade of
04:33bad retail experiences at the hands of
04:36in 2001 apple launched its first apple
04:39retail store to enable its customers to
04:41buy apple products directly from their
04:43outlets now apple has many retail stores
04:45which increased customer satisfaction
04:51mcdonald's acquired a tech company
04:53called dynamic yield in 2019
04:56mcdonald's plans to improve their
04:58digital customer experience touch points
05:00with this acquisition
05:02the technology allows menus at
05:04mcdonald's drive-throughs to change
05:05based on different factors including
05:07weather current traffic and more
05:10this is another example of forward
05:14like most corporate strategies vertical
05:16integration has both advantages and
05:19some of the advantages of vertical
05:21integration includes following
05:25many businesses face problems with their
05:29this might be late deliveries poor
05:31service or failing to update and adapt
05:35at the same time suppliers may be
05:37situated in a location that is
05:38unfavorable meaning deliveries take
05:41longer and are more likely to be late
05:44through vertical integration firms are
05:46able to benefit from a close cooperation
05:49between both parties
05:51it controls part of the supply chain so
05:53difficulties can be ironed out
05:55two power over suppliers and buyers
05:59certain players in the market might be
06:01difficult to work with but are necessary
06:03in order to do business
06:05by vertically integrating businesses are
06:07able to avoid dealing with such
06:09companies or at least better dictate
06:11terms and prices with them after all it
06:13owns one of its competitors
06:18when two firms at different stages of
06:20the supply chain join together the
06:22feedback connection is enhanced
06:24when trends or tastes are changing this
06:27can be proactively fed back to the
06:28integrated suppliers who can then work
06:31on an alternative solution
06:33for example zara is a spanish clothing
06:36and accessory company that has over a
06:38thousand stores worldwide it owns both
06:40the manufacturing and designing of its
06:42clothes which allows it to have a
06:44greater say on what customers like and
06:48the retail stores have these statistics
06:50and in turn those can be translated into
06:55lower prices for consumers
06:58each stage of the supply chain obtains
07:00some level of profit
07:02through vertical integration the new
07:04firm is able to capture both sets of
07:07at the same time it can benefit from
07:09several economies of scale thereby
07:11allowing it to charge lower prices
07:13in a competitive market these cost
07:15savings are likely to be passed on to
07:17the consumer providing it with a
07:19competitive advantage
07:22however it's important to note that
07:23vertical integration also has many
07:271. high costs vertical integration can
07:32not only are there the financial costs
07:34but also the time and effort to purchase
07:36as well as integrate the new firm
07:39there are then additional costs such as
07:41moving factories and other facilities so
07:43they are closer to the purchasing
07:46these can potentially prove to be wise
07:48investments but at the same time they
07:49are difficult to reverse
07:52management difficulties
07:54owning a manufacturing business is very
07:55different from being a retailer being a
07:58successful retailer does not make for a
08:00successful manufacturer
08:02some of the existing management may be
08:04kept on board to help in this regard
08:06however it can be very difficult for
08:08them to work in a new environment by
08:10which they have to answer to the parent
08:15integrating a new company is a lot of
08:17work integrating a company that is at a
08:19different stage in the supply chain is
08:21even more difficult particularly due to
08:24the lack of experience in that field
08:26for example running a successful retail
08:28business requires a different set of
08:30skills than a profitable factory
08:32it is difficult to find a ceo that is
08:37reduce flexibility as previously
08:40mentioned vertical integration can
08:42provide some level of flexibility by
08:44allowing information to feed backwards
08:46into the supply chain
08:47however if the integrated supplier is
08:50making products a and b it may then need
08:52to make product c instead
08:55yet it may not have the equipment to do
08:58this requires time and investment to
09:00move production to another product
09:03all right let's do a quick summary
09:06vertical integration is a strategy that
09:08allows a company to streamline its
09:09operations by taking direct ownership of
09:11various stages of its production
09:13processes rather than relying on
09:15external contractors and suppliers
09:18there are two major types of vertical
09:21backward integration and forward
09:23integration like most corporate
09:25strategies vertical integration has both
09:28advantages and disadvantages
09:30its major advantages include reliability
09:32power over suppliers and buyers
09:35flexibility and lower prices for
09:38on the other hand its major limitations
09:41include high costs management
09:43difficulties loss of focus and reduced
09:48what do you think about vertical
09:51please leave your thoughts in a comment
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09:58thanks for watching and i will see you
