Forward vertical integration is a type of vertical integration that involves a business owning and controlling the business activities that are further up (forward) the supply chain. A good example of forward vertical integration is a vehicle manufacturer buying a car retail business. In this article, we will discuss some real-life forward vertical integration examples and explain how the companies in question have used this strategy for the benefit of their businesses.
What is forward vertical integration?
Forward vertical integration is a business strategy that involves a company advancing downstream in the supply chain. The downstream of the supply chain extends from the point at which goods are produced to the point that they are sold to consumers. This means that a company, when implementing forward vertical integration owns and controls the business activities that are ahead in the supply chain of its industry such as the direct distribution or supply of its products.
There are so many real-life forward vertical integration examples. Companies such as Amazon, Tesla, Apple, etc make use of this type of vertical integration. In this type of vertical integration, a company replaces third-party distribution or supply channels with its own in order to consolidate operations, lower production costs, increase the company’s efficiency, and get closer to end consumers in the value chain. Forward vertical integration is also known as cutting out the middleman because the company gains ownership over other companies that were once customers. That is, a company integrates forward by acquiring or merging with business entities that were its customers.
Forward vertical integration is the opposite of backward vertical integration. A supply chain involves the procurement of raw materials, production, distribution, and sale of finished goods or services. Therefore, when a company utilizes forward integration, it owns and takes control of business activities that are downstream of the supply chain which include the distribution, and sale of finished goods or services; whereas a company that integrates backward takes control of business activities that are upstream of the supply chain such as the procurement of raw materials (owning organizations that were once its suppliers).
There are several benefits of vertical integration, whether forward or backward; which also has its disadvantages. Despite the disadvantages of vertical integration, a lot of companies have gained the upper hand over their competitors by implementing either forward or backward integration. Having understood what forward vertical integration is, let’s look at some examples of forward vertical integration companies.
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Forward vertical integration examples (companies)
- Mc Donald’s
A lot of companies today make use of the forward vertical integration strategy to lower production costs, increase their efficiency, and get closer to end consumers. Here are some forward vertical integration real life examples and how they use this strategy to their advantage:
Amazon, as an example of forward vertical integration
Amazon is one of the well-known examples of forward vertical integration companies. Since its inception, Amazon has used backward and forward vertical integration in various business functions. This company is vertically integrated both forward and backward. The company publishes books itself and provides a publishing platform for independent writers and also owns its own transportation and distribution channels.
A typical example of forward vertical integration strategy is Amazon Transportation Services (ATS). This controls the transport and distribution of eCommerce items to the end user. That is, the company makes a move forward in the supply chain by owning and directly controlling delivery to end users rather than relying on third-party services. This has been beneficial to the company as the ATS saves money and is the fastest and most convenient way of delivering packages to customers around the world.
Another forward vertical integration example is the acquisition of Whole Foods Market by Amazon. Amazon, on August 28, 2017, acquired Whole Foods Market for $13.7 billion. Before this acquisition, Amazon was in the grocery business on a small scale, but the purchase of Whole Foods made it a major player overnight. This investment increased the market share of Amazon in the retail business as it enabled the company to sell food to consumers through brick-and-mortar stores, and not only online.
The Whole Foods acquisition is a typical example of forward vertical integration because the acquired Whole Foods retail shops serve as outlets for Amazon to sell its products and have customers walk in to make purchases, which gives the company the opportunity to get closer to its customers physically.
Mc Donald’s forward vertical integration example
A good example of forward vertical integration is a fast food company like McDonald’s acquiring Dynamic Yield, a tech company. In 2019, McDonald’s acquired Dynamic Yield to increase personalization and improve its digital customer experience. McDonald’s makes a move forward in the supply chain by using AI technology to help make the ordering process more efficient and reduce service times. Thus, improving the overall customer experience.
Through this AI integration, personalization is increased as automated systems made real-time menu recommendations based on weather conditions, consumer trends, and ordering habits. That is, the technology allowed menus at McDonald’s drive-throughs to change based on different factors, such as trending menu items, weather, and current restaurant traffic. Once a customer has started ordering, the display can also recommend additional menu items based on what the customer had already chosen.
This is one of the forward vertical integration examples because Dynamic Yield played an essential role in McDonald’s digital transformation, as it allowed the company to become even more focused on its customer by using AI technology in outdoor digital Drive-Thru menu displays, and other digital customer experience touchpoints, like the McDonald’s Global Mobile App and self-order kiosks. This increases the company’s efficiency and makes it get closer to its end consumers.
Tesla, as an example of forward vertical integration in the car industry
Tesla is an example of forward vertical integration in the car industry. This company is vertically integrated because it controls the majority of the stages of its supply chain; from raw materials sourcing to final assembly and selling directly to consumers. This vertical integration strategy has helped the company to be more efficient compared to other automakers.
Tesla uses both backward and forward vertical integration. The company integrates backward by making most of the components used in the manufacture of its cars. It also integrates forward by owning its own stores where it sells the cars manufactured. Tesla is one of the forward vertical integration examples because it controls its sales and distribution. This is done by adopting a forward vertical integration approach where it sells vehicles directly to customers through its own stores and website, thus, having more control over the customer experience.
Nike and its forward vertical integration strategy
One of the forward vertical integration examples is Nike. This company in 2011 announced a forward vertical integration strategy called Consumer Direct Acceleration whose ultimate goal was to increase the company’s direct-to-consumer (DTC) sales. Apart from the fact that the DTC sales were more profitable, the forward integration strategy allowed Nike to have more control over how its brand was presented to consumers.
Hence, the best example of forward vertical integration is Nike reducing its dependence on wholesalers, distributors, and retailers, and prioritizing direct-to-consumer sales. This was seen as the major reason why Nike stopped selling its products on Amazon. By selling more products directly to the consumer, the company focused on elevating consumer experiences through more direct and personal relationships.
The direct-to-consumer sales grew from 16% of Nike’s revenue in 2011 to 35% of Nike’s revenue in 2020. This company has continued to grow its Direct-to-Consumer sales since 2011, thus, selling its products directly to its end customers without depending on wholesalers, distributors, and retailers.
Apple is also vertically integrated forward
Apple is one of the forward vertical integration examples. This company, before 2001, sold its products through third-party retailers and many of these partnerships were detrimental to the company’s net income. During this time, the purchase of an Apple product marked the end of the company’s interaction with customers. In order to address this issue, the company decided to forward integrate by focusing on the experience of using an Apple product and the problems they can solve for consumers.
Hence, Apple, in 2001, launched its first Apple retail store to enable its customers to purchase Apple products directly from their outlets. Today, Apple has many retail stores which has increased customer satisfaction. This is one of the real-life forward vertical integration examples. This forward integration strategy has enabled Apple to establish a relationship with its customers that involves expert customer support, maintenance, and repairs.
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