Each month we highlight a forward-thinking business strategy or idea. February’s Big Idea is “vertical integration.” Although the term may sound dull and uninspiring, vertical integration is a challenging and revolutionary business strategy that all professionals should learn more about.
What is it?
Vertical integration, also called “vertical combination,” is defined as the combination of two or more stages of production, which are commonly operated by separate companies. In other words, bringing two different companies with different functions together to operate as one team.
Which companies have done this?
The oil industry is a great example of a company that utilizes vertical integration. In the 70s and 80s, oil companies primarily worked to find and extract crude petroleum. Shortly thereafter, companies like BP and Shell began to take control of the entire process — not just extracting oil, but distributing the product, too. Soon they controlled every aspect of the industry, from taking the oil out of the ground to pumping it into consumers’ vehicles.
But it isn’t just the oil industry that has taken hold of this model. Computer firms (greatest example? Apple!) have taken up this practice, and even some clothing retailers like American Apparel.
The challenges:
Vertical integration certainly isn’t a strategic model for the faint of heart (but then again, that’s a characteristic that entrepreneurs rarely identify with). It takes money, new business expertise, and a steady refusal to revert. Once you make the move to integrate, it’s nearly impossible to go back without losing ground.
But, done the right way, a vertical integration strategy has huge promise and potential. As American Apparel writes in its company statement:
“We believe that having manufacturing under the same roof as design, marketing, accounting, retail and distribution gives us the ability to quickly mobilize all departments, to respond directly to changes in the market, and to have complete visibility over our product – start to finish. An added bonus – this business model is inherently sustainable.”
Given the challenging economic environment, however, many companies simply don’t have any other options but to integrate vertically. Jon McConaughy, owner of Double Brook Farm, created a revolutionary farming model that includes a heavy dose of vertical integration — his farming strategy includes not only a farm, but also a restaurant and market. He argues that vertical integration is one of the only ways that farms can truly impact the agricultural and food industries by making sustainable and wholesome products readily available.
What you can do:
Attend an informative event. Jon McConaughy will be speaking at our luncheon on March 1. Find out more information about his vertical integration strategy and sign up here.
Read up. Check out these reads: “Vertical Integration, Outsourcing, and Corporate Strategy” by Kathryn Harrigan; “Marketing Strategies and Paradigms” by Hephaestus Books.
Princeton Regional Chamber of Commerce 