Vertical integration the ownership of inputs or

Vertical Integration
 The ownership of inputs or distribution channels
– “What percentage of a firm’s sales is generated within the firm’s boundaries?”
 Backward Vertical Integration
– Owning inputs of the value chain
 Forward Vertical Integration
– Owning activities closer to the customer
Backward and Forward Vertical Integration Along the Industry Value Chain

The Vertical Value Chain of Your Cell Phone
 Raw materials
– Chemicals, ceramics, metals, oil for plastic
 Intermediate goods and components
– Integrated circuits, displays, cameras and batteries
 Original equipment manufacturing firms
– Assembly
 After-sales service and support
– AT&T, sprint, T-mobile, Verizon etc
Forward and Backward Integration: The Smartphone Industry
Benefits and Risks of Vertical Integration
Benefits
 Lowers costs
 Improves quality
 Facilitates scheduling and planning
 Facilitates investments in specialized assets
– Co-located assets, unique equipment, human capital
 Secures critical supplies and distribution channels
When does vertical integration make sense?
 When there are issues with raw materials
– Eg. Henry Ford ran mining operations
 To enhance the customer experience
– Eliminate annoyances & poor interfaces
Risks
 Increase in costs
