Check out this article: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2959
Many companies across various industries use vertical industries. For example, one of the best features of Zara’s business model is its vertical integration strategy. Vertical integration is when a single company owns several parts of its value chain. For Zara, this means it manufactures its clothing in its own factories rather than obtaining it from other companies. They produce sixty-percent of their merchandise in-house, whereas many clothing retailers outsource their production to cut labor costs. With localized manufacturing, Zara is able to more easily utilize just-in-time manufacturing. This allows them to maintain low inventories and produce only the amount of items demanded by customers in an efficient manner. A unique thing about Zara is that half of its fabric arrives in the factory un-dyed so that they can immediately adjust colors of clothing in-season as trends change. Vertical integration works very well for Zara because they have impeccable coordination of their business activities and produce efficiently. They have driven great demand for their products through limited runs of specific types of clothing because the exclusivity encourages customers to buy as soon as new clothing is released at full price.
Vertical integration is a strategy used in other industries and companies as well. The article explains that the tech industry is moving towards greater use of vertical integration. Apple has successfully utilized this strategy for thirty-five years by integrating its hardware and software production. As companies such as Google and Sony start vertically integrating their business models, there is concern that these tech companies will lose coordination. They feel pressure to keep expanding into new areas of technology, but in doing so they may have weaker parts in their supply chain. For many companies, focusing on one part of the supply chain is better because they learn to do their part efficiently and minimize confusion. The focus of the company can be lost when it turns into a conglomerate because there are multiple product lines that do not all receive enough attention to perfect them. The article says “there is a reason that large conglomerates tend to trade at a discount on Wall Street—they are harder to manage.” In addition, consumers may suffer by having products with less overall quality.
Apple has done well managing the hardware and software of its various products, but most PC companies rely on many companies to supply specific parts. This allows for more specialization because each companies focuses specifically on one part of the entire supply chain and perfects it. Typically, the specialization strategy is effective with commoditized products because less differentiation is necessary. Vertical integration is becoming more favorable to tech companies because they are able to differentiate their product offerings, as well as have more control of individual parts that lead to the final product. For example, Google expanded its focus from just serving as a search engine to creating the Android mobile operating system and then acquired Motorola Mobility to make its own smartphones and television set-top boxes. Similarly, Samsung makes many products ranging from smartphones to televisions. On the other hand, Sony has struggled to effectively manage its TVs and game systems with a vertical integration strategy. Research in Motion has also had difficulty with integrating the operating system of an acquired company with their own hardware.
There are concerns with vertical integration in both the retail and tech industries. Zara has set up the infrastructure for high efficiency; similarly, Apple has built its company up so that it has strong leverage with its contractors. To achieve these business models takes time and careful planning, but many companies are trying to convert too quickly or on too great of a scale. Some tech companies may start working on too many products in the industry and lose the high performance of specific parts that they had previously focused on. How will companies balance this transition and is it even worth it?