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Learning about Vertical Integration

Hellow! Amanda here from the Think team!

You’ve probably heard or read about vertical integration from our founder's blog here, or perhaps even from the current business trend. Recently I have been trying to comprehend this vertical integration from a operations management point of view. The term itself originated as business model concept, which refer to a "strategy whereby a company owns or controls its suppliers, distributors, or retail locations to control its value or supply chain". This could be beneficial as the company as its control different stage in the business process, reduce costs and improve efficiencies. One perfect example that helped me understand this concept is the Netflix case. Netflix began as a DVD rental business prior to moving into online streaming of movies and motion pictures from major studios. At that point, Netflix realised that they could improve their margins by producing their own movies and series . Today, Netflix optimise its loyal subscribers and distribution model to advance its original content along with existing contents from major studios. With focused key activities and business model that produces a tangible products and services, vertical integration seem digestible.

There are types of vertical integration. For the Netflix case, it was backward vertical integration which takes place when businesses at the end of the supply chain take on activities that are "upstream". In essence, when an organisation acquires a supplier (known as in backward integration) or if it acquires a client firm (forward integration). Although trendy, the implementation of this concept may not be suitable for all companies. It is important to note that, vertical integration may lessen the costs and make a more systematic supply chain, the capital expenditures can be huge. As an alternative to vertical integration that includes acquisitions up or down of the network, there is a horizontal integration which focuses on obtaining of a competitor or a connected business. Horizontal integration beneficial for business size expansions, enhance item contributions, lessen rivalry, and venture into new business sectors, while vertical integration can help boost financial benefit and be more accessible to customers.

As I was preparing for the monthly retreat, I finally understood connecting this concept with our differentiated services. As described by Tak in his blog, vertical integration in means that integration of activities is as important as focusing on the “meaning” to be a gift maker instead of a value and function added by each activity. As I am still learning, I have prepared a depiction vertical integration for the retreat, which I really hope other giftmakers can give me feedbacks so I can get better at this ;)

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