Amazon’s vertical integration strategy has helped the company to become one of the most successful companies in the world. It has transformed from an online bookstore to a global e-commerce giant. We will see the impact of Amazon’s vertical integration strategies, its examples and usefulness in dominating competitors, and the disadvantage of Amazon being vertically integrated.
What is Vertical Integration?
Vertical integration is a business strategy that involves combining multiple stages of production or distribution under one company’s control to increase efficiency, reduce costs, and increase the profit margin of the company. It can include any stage in the supply chain; from the supply of raw materials to production, distribution, and selling directly to customers. To better understand vertical integration, you have to know the product that a company produces or the services it offers and then see any other steps along the supply chain that the company has acquired. For example, Tesla is an automobile manufacturer; therefore, automobiles are the main products of Tesla. However, Tesla has vertically integrated so many steps in its supply chain such as producing its own batteries for its electric cars, creating its own software, having its own supercharger networks for charging the car batteries, and even going as far as offering insurance for its customers who are interested.
Does Amazon use vertical integration?
Amazon is one of the big companies in the world that use vertical integration and this has been of much benefit to the company. For example, Amazon’s main service is the facilitation of the selling of products online. When Amazon started e-commerce, these products were from various sellers. As Amazon began integrating vertically, it transformed to start owning its own vehicles to distribute the products being sold instead of using third-party logistic companies. It then started creating and manufacturing some products itself instead of relying on the sellers.
All these steps taken by Amazon, from having its own vehicles for logistics to creating its own products to sell are examples of vertical integration strategies. Other examples of Amazon’s vertical integration strategies are discussed in the following sections.
Amazon Vertical Integration Examples
- Amazon Logistics
- Amazon Private Labels
- Amazon Web Services (AWS)
- Partnership with Book Publishers
- Acquisition of Whole Foods
- Amazon Health Care and Amazon Pharmacy
- Amazon Financial Services
Amazon Logistics and Delivery
Amazon’s logistics and delivery service is another example of vertical integration by the company; it ensures the company can make faster and more reliable deliveries of orders to its customers. Amazon can handle all aspects of delivery in-house, from sorting and packing to shipping and final door-door delivery to its customers. This has helped Amazon to improve its services by offering same-day delivery to qualifying customers.
Being vertically integrated this way comes with added benefits to Amazon because apart from ensuring that packages arrive on time, it also ensures that packages are not damaged. It means the losses that Amazon may incur due to customers returning the damaged products will be reduced greatly.
Amazon Private Labels
Private labels are a prime example of Amazon’s vertical integration strategy. Amazon owns several products that it produces and manufactures them itself. Private labels such as Pinzon, Solimo, Wag, Mama Bear, etc, are all owned by Amazon. These private labels include products such as clothing, snacks, dog food, shoes, electronics, home goods, office supplies, baby wipes, tech accessories, and many more. This Amazon’s vertical integration strategy allows the company to increase its profit and also expand its reach in the market. By producing and manufacturing some products that it sells, Amazon exercises greater control over the entire supply chain and gains a competitive advantage over other retailers who rely exclusively on third-party suppliers.
Vertically integrating the production of its own products ensures Amazon does not rely on third-party suppliers that may be irregular in their supplies. It means that the company would ensure that its in-house products are always available to its customers compared to that of the third-party suppliers who may run out of stock.
Vertical integration also ensures that Amazon can channel its resources and funds into what customers are buying instead of relying on suppliers who may produce what is not needed by customers. For example, if Amazon sees customers are interested in buying televisions but the televisions are always out of stock, it can channel funds into the production of its own television to ensure that the company meets the demand of the customers. This means more profit to the company, more satisfaction to the customers who can now order what they want at any time without worrying about the product going out of stock, and more quality control since Amazon is making the televisions themselves.
Partnership with Publishers through the Amazon KDP program
Another innovative example of Amazon’s vertical integration strategy is its partnership with book publishers. The publishers design and write the books such as children’s coloring books, story books, fiction, etc. while Amazon takes care of the selling, printing, marketing, and distribution of the books through various channels and then gives a commission to the publishers. This Amazon’s vertical integration example saves costs and increases profits for the company because the books are only printed and shipped when the customer makes an order and pays for it. This is better compared to Amazon buying these books from the publishers and hoping that customers may find them interesting.
Amazon Web Services (AWS)
Being an e-commerce company, Amazon will need a reliable hosting service, security software, machine learning functionalities, and analytics to measure different metrics. Instead of relying on third-party companies to offer these services, Amazon used the vertical integration strategy to build and set up its own web services known as Amazon Web Services (AWS).
Amazon Web Services (AWS) are very broad cloud-based services that power Amazon and many other companies and businesses online. AWS is a major source of revenue for Amazon because other businesses rely on it to provide them with servers, storage spaces, networking, remote computing, emails, mobile development, and security online.
Amazon’s vertical integration example of providing its own web services has tremendously increased the revenue of the company and at the same time, giving control to the company over the infrastructure upon which the company relies. It means Amazon creates, manages, builds the data centers, and controls the quality of AWS; this helps to ensure it is reliable for the smooth and efficient running of its business.
Other benefits of this backward vertical integration strategy by Amazon include enabling the company to produce highly scalable services at competitive prices while maintaining full control over product development. Moreover, since it owns both the hardware and software layers of its services stack, AWS can quickly innovate new features or improve existing ones without relying on third-party vendors.
Acquisition of Whole Foods
The acquisition of Whole Foods for 13.7 billion dollars on August 28, 2017, is a good example of Amazon’s vertical integration strategy. This allowed Amazon to expand its operations into multiple stages of the production and distribution process. By acquiring Whole Foods, Amazon has not only gained access to a leading grocery retailer but also control over its supply chain and logistics. This vertical integration step allows Amazon to gain more customers because the existing customers of Whole Foods automatically become Amazon’s customers. It also added more retail outlets for the sale of Amazon’s private labels.
The acquisition also increases the market share of Amazon in the retail business because all the Whole Foods retail shops across other countries such as Canada and the United Kingdom, become that of Amazon and serve as outlets where Amazon can get physically closer to its customers. Customers can simply walk into the nearest stores to make purchases and not necessarily make orders online.
This Amazon’s forward vertical integration example has strengthened Amazon’s position as an industry leader in both retail and e-commerce spaces.
Amazon Health Care and Amazon Pharmacy
Amazon has been making significant strides in expanding its business operations into the healthcare industry as well; it shows Amazon does not only want to sell clothes, books, shoes, etc to its customers but also sell healthcare too.
This Amazon’s vertical integration strategy will help the company to position itself as a one-stop-shop for healthcare needs through its acquisition of One Medical and owning Amazon Pharmacies. This strategy reflects how the company is willing to go beyond traditional boundaries by investing in businesses that complement what it already offers to its customers. The services of Amazon, therefore, have now been extended to allow customers to also purchase medications and healthcare.
Amazon Financial Services
Amazon Financial Services is another example of Amazon’s vertical integration strategy. These financial services include payment processing, lending to small businesses in the U.S., and insurance. By offering these services in-house, the company does not only improve the customer experience but also increases its bottom line by reducing outsourcing costs and at the same time generating new revenue streams.
Instead of using a third-party payment processor that may have several issues such as a security breach, high cost of processing payments, payment errors, and glitches; Amazon acquired its own known as Amazon Payments. This will allow the company to control how it makes payments by ensuring a high level of security, errors can easily be resolved, seamless operations, and tailoring the payments according to the need of the company.
This Amazon vertical integration strategy added more revenue to the company as it has become an indispensable daily tool for smaller businesses that use the Amazon payment processor as well as other financial services.
Other financial services that are vertically integrated by Amazon are branded credit cards with exclusive rewards programs that can only be used at Amazon.
Advantages of Vertical Integration to Amazon
- Vertical integration allows Amazon to offer products at lower prices than its competitors
- The quality of its services is improved with vertical integration
- It leads to increased productivity and efficiency
- Products delivery that can be monitored efficiently
- It gives Amazon more control over the customer experience since they have direct access to all aspects of the purchase process.
The quality of its services is improved with vertical integration
Vertical integration is beneficial to Amazon in improving the quality of services and products it offers. For example, Amazon is able to decide how to package its orders, especially products that are delicate such as glasses, Machines, ELectronics, etc. It will also instruct the drivers on the nature of the goods they may be carrying in order to put in more care while delivering the orders for their customers.
It would be different if Amazon were to use a third-party logistics company that often combines delicate goods together with goods from other companies. When this happens, some goods or products may reach the customers damaged or altered which eventually hurts Amazon’s sales. Therefore, being vertically integrated by owning its own logistics vehicles and planes, Amazon can deliver the orders intact to its customers.
Amazon’s vertical integration strategy increases its productivity and efficiency
Because of the control that vertical integration offers, companies can control their output and efficiency to a large extent. For example, if Amazon were to rely on a third-party logistics company to deliver its products, it may not control the time it will take to deliver to a customer because the urgency which Amazon may require may not be reciprocated by a third-party delivery company, which may care less.
Also, the third-party delivery company may not have enough vehicles to meet the demands of Amazon especially when there are so many orders at the same time. This may cause a delay in shipping products to customers. But Amazon, vertically integrated its delivery and logistics step of the supply chain is able to fulfill the orders of its customers quickly. Even when the number of customers increases, Amazon may decide to add more cars, planes, etc to meet its needs compared to using a third party. Through these means, Amazon’s vertical integration increases its productivity and efficiency.
Proper and efficient monitoring of the delivery of the products
Amazon owning its own logistics and delivery step of the supply chain helps it to track the distribution of all orders through a centralized system. Amazon has a system through which it can monitor in real-time the delivery of every package throughout the entire journey from warehouse to doorstep. This ensures that customers get their orders quickly and prevents packages from being missing.
Disadvantages of Amazon’s Vertical Integration Strategy
- Increased complexity and risk
- Higher costs and capital requirements
- Potential conflict of interest
- Difficulty in adapting to market changes
- Less innovation and external collaboration
Increased complexity and risk
Amazon’s vertical integration strategies are complex and each new step can be risky. As the company tries to expand its operations, each step being acquired comes with new problems like coordinating different processes, recruiting and managing the teams, and mitigating risks associated with each segment. This complexity can be expensive, demanding, and may also increase the likelihood of operational errors.
Higher costs and capital requirements
Vertical integration is very expensive to successfully set up because every step of the supply chain that a company acquires is like starting a small business; that is why Elon Musk while talking on Tesla’s Vertical Integration referred to these steps as “Chains of Startups“.
Amazon spent billions of dollars on its infrastructure, technology, logistics networks, etc. These increased costs can impact profitability and put pressure on financial resources. Each step must be carefully planned as failure means that the company has been set backward in terms of finances and may cause bankruptcy.
Conflict of interest
Amazon’s vertical integration strategy can cause conflicts of interest between different departments or segments since the company is vertically integrated across different sectors, including e-commerce, cloud computing, media production, healthcare, and logistics. This diversification may lead to situations where Amazon’s different divisions compete against each other, potentially diluting focus, and hindering progress and collaboration.
Amazon’s vertical integration has been incredibly effective in helping the company to become one of the most successful companies currently in the world. By owning nearly every step in its supply chain, it is able to provide an unparalleled level of service that has outperformed its competitors. However, Vertical integration is costly to acquire in a business and also costly to maintain.
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