Top 3 Examples Of Vertical Integration

Vertical Integration is a process in which the company controls its supply chain. It happens when a company assumes control over several of the production steps which was involved in the creation of the product in that industry.

The control in the supply chain is usually done through the acquisition of companies or starting a new segment in the company.

Vertical Integration is the opposite of Horizontal Integration in which the company expands at the same level of the supply chain.

In simple words, vertical integration involves purchasing a part of the production or sales process that was earlier outsourced to have it done in-house.

The prime intention of adaptation of the vertical integration strategy by a company is to gain control over its supply chain and increase its profit margins.

It can also benefit the company by adapting to lower pricing strategies, having a better knowledge of consumer behavior, and providing more facilities to the end consumers.

In this story, we gonna discuss the top 3 examples of Vertical Integration.

SpaceX

SpaceX is an American aerospace manufacturer and space transportation services company. It was founded by Elon Musk in the year 2002. The main aim of the company was to reduce the space exploration cost and enable colonization in mars.

SpaceX is a great example of Vertical Integration to lower the costs of its deliverable. By producing most of its components in house, it is able to undercut its costs largely as compared to its competitors.

In 2001, Elon went to Russia to buy cheap rockets. But he failed to find rockets at an affordable price.

Later, Elon calculated that the raw materials for building a rocket actually were only three percent of the sales price of a rocket at the time. He realized that he could start a company that could build the affordable rockets he needed.

Hence Elon started SpaceX.

By applying vertical integration, producing around 85% of launch hardware in-house, and the modular approach from software engineering, SpaceX could cut launch price by a factor of ten and still enjoy a 70% gross margin.

SpaceX enjoys several advantages over its competitors because its competitor has a dispersed supply chain where various suppliers were producing at cost plus a profit margin, resulting in millions of inflated costs per launch.

SpaceX’s competitor United costs $460 million per launch whereas SpaceX’s cost is $90 million per launch, which is also falling due to its reusable design.

By adopting vertical integration, SpaceX

• Lower its price per launch.
• Increase profit margins.
• Better knowledge of the product and its supply chain.

Apple

Another great example of vertical integration is Apple. It has retail locations to sell its products as well as manufacturing facilities across the globe for its production.

Apple has its own manufacturing facilities in Taiwan, North San Jose, etc. In the manufacturing facilities, Apple manufactures its custom A-series chips, touch id, LCD and OLED screens, etc.

Along with other manufacturing investments in several countries, Apple strengthens its supply chain by backward integration. However, it still has external suppliers for its various parts.

Similar to backward integration, the company has also integrated forward by opening up its own retail outlets in several countries.

By integrating vertically, Apple enjoys freedom in its manufacturing abilities as well as control its distribution and sale to the end consumer.

DMart

Dmart is a successful supermarket chain operating in India. Avenue supermarts limited owns and operates DMart.

Today, Dmart has a presence in 214 locations across India. Their main focus is on to be the lowest priced retailer in the regions they operate and planning to grow in new locations

Dmart is another example of Vertical Integration.

Due to the boom in the e-commerce industry in India, many supermarket chains faced a backlash.

But, DMart has consistently delivered returns to the shareholders and costumers by implementing vertical integration.

The company usually operates in its own stores. By doing this, the company saves money on rentals and have better space optimization.

DMART has also created its own inhouse brands such as Minimax, Premia, Homes, etc.

By adopting vertical integration, DMART increases its profit margins, increases its control over the outlets, and get to know its consumer behavior more clearly.

Here, In this story, we discussed Vertical Integration and its examples.

Want to know What is Vertical Integration? What is its definition? What are the advantages and disadvantages of it? How it is different from Horizontal Integration?

Then, you can visit my blog and read an article about it. I have discussed all of these in a very precise manner along with proper examples. Click here to visit the article.

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