Most Black business owners don’t understand the concepts of different business structures, integration, and strategies for growth, sustainability, or success. They think they need to do everything or be everything to build multi-million-dollar businesses. WRONG! A true successful entrepreneur looks for ways to expand their marketing share and get business exposure that will cause the bang they need for success.
Why should I VI?
Let’s look at Vertical Integration (VI). VI denounces businesses building manageable and active internal departments to improve profits and increase market share. VI is a strategy where a business expands its business operations into different steps on the same production path, such as when a manufacturer owns its supplier and distributor. It helps firms reduce expenses and become more proficient in their processes.
VI can also help Black businesses reduce having limited to no access to critical business elements they may need to survive or thrive, such as bypassing a monopoly-type supplier’s hold on a supply chain. Black businesses can gain economies of scale by increasing their buying power and consolidating possible management and other processes. VI will help them control access to physical resources they may need or get resources developed by other businesses. Plus, it will help them limit access to control inputs towards their business. When you vertically integrate, you no longer depend on just your suppliers and can avoid disputes that will cause disruptions in your supply chain.
How VI works?
This is how VI looks when it works. When businesses such as Ticketmaster and Live Nation merged to form a VI entertainment company that produces shows, sells event tickets, and manages or represents the artists involved in the shows.
Do you need another example? Let’s look at it from a technology viewpoint. When Apple, Inc. self-manufactured custom chips for its products. Did you know that before they vertically integrated, Apple, Inc. implanted Samsung’s (their industry competitor) manufactured chips in their products?
Ok. Still not convinced. Here’s another example. A mortgage company decides to originate and service its mortgages, plus offer life insurance plans alongside its mortgages. So, they vertically integrated into a loan-servicing mortgage firm with life insurance plan options.
These types of vertically integrated businesses reduce costs and improve efficiencies, such as transportation costs and reducing turnaround time.
Two Forms of VI: Forward and Backward
FVI
Forward Vertical Integration (FVI) is an operational strategy that an entrepreneur uses to increase their business’ control over its suppliers, manufacturers, or distributors to increase its market power. They control their supply chain stages from the beginning. By doing this, the entrepreneur can control their business activities and expand to direct distribution and supply control of their products or services. The example I used earlier with Ticketmaster and Live Nation is classic FVI. Apple, Inc. uses FVI with company-owned retail stores to sell their products exclusively. Very few select big-box retailers sell Apple products, but Apple, Inc. controls the distribution and costs to consumers.
Improving economies of scale and increasing your business’ industry market share is why you use FVI. Before you attempt FVI, understand your costs and scope strategy and ensure you don’t compromise your core business competencies. If you want a successful FVI, look to acquire businesses that were previous clients or customers.
BVI
Backward Vertical Integration (BVI) happens when a business operating at the end of a supply chain begins to take on activities at the beginning of the supply chain. When a business moves backward in its supply chain, it seeks to improve its cost-savings and efficiency. You perform BVI when you cut transportation costs and improve efficiency to increase your profit margins by making your business more competitive.
BVI isn’t easy to do. Why? Because it’s a difficult strategy to reverse-engineer a process. Reverse engineering can be very expensive to a Black business that doesn’t have a large amount of capital. If you don’t BVI successfully, you’ll spend large amounts of capital and lose flexibility in following industry trends to remain competitive. The entrepreneur, CEO, or executive leadership must not lose focus on the business’ mission because BVI can cause disruptions in the firm’s organizational culture if not performed correctly.
Netflix successfully used BVI and became a conglomerate. They started manufacturing movie content in addition to being a movie distributor. Apple, Inc. performed BVI by manufacturing their iPhone and iPad microchips to perform FVI. Amazon used BVI when it became a book retailer and a book publisher. Amazon reduced its costs of producing and procuring books. Starbucks used BVI by having multiple suppliers and vendors for their coffee beans and personalized items within their stores. They purchased a Chinese coffee farm (FVI) to eliminate their coffee bean supplier, if they want, and control the cost of the supply chain process. They ensured they always had a supply of coffee beans for their consumers.
Each example above using BVI was a consumer of raw materials from a supplier or vendor. They determined there was an opportunity to integrate, set up their facility, or buy a competitor to have a more reliable, cost-effective, and sustainable input supply.
VI, whether forward or backward, is a risky strategy! You must either re-engineer or deal with complex and expensive operations. So, you should VI to protect or create value because it’s detrimental to your business's success.
You should VI only if:
1. Your market is too risky and unreliable.
2. You control costs and gain more control over your production or distribution processes.
3. Businesses in the closest stages of the industry chain have more market power than vertically integrating businesses.
4. You gain an advantage over your product presentation prices to their consumer market.
5. The VI would create or exploit market power by raising entry barriers or allowing price discrimination across customer segments.
6. You’re eliminating an extra cost step in the supply chain process to remove cost increases, optimize resource utilization, and avoid cost waste.
7. Your market is young, and your business must FVI to develop a market, or the market is declining, and other businesses are pulling out of adjacent stages.
Use these reasons as a risk management tool for your business to increase the probability of success.
Concentric Diversification Strategy (DS)
Businesses use VI for different reasons but have similar goals, and they combine their VI with an embedded Diversification Strategy (DS). They do this to minimize the risk of major losses. AT&T used a concentric DS to attempt their VI with Time Warner. A Concentric Diversification Strategy (CDS) is when a business acquires or creates new products or services to reach more consumers. These new products and services are closely related to the company’s existing products and services. AT&T’s VI with Time Warner to achieve a competitive advantage in the telecommunications industry by creating business synergy. They had telephone lines and cell phone towers, but acquiring a cable television firm will increase its product distribution and move the firm into new market areas. Their CDS will increase product distribution and improve AT&T’s ability to improve product development. Acquiring a cable television company and its other telecommunications products will ensure they’re fulfilling the needs or demands of their given markets, plus all newly acquired Time Warner markets. AT&T used its CDS in its VI to increase its market share and give itself a larger presence in the very competitive telecommunications industry. Their CDS within their VI gave them a wider market presence.
Sometimes, a CDS can cross into a Horizontal Diversification Strategy (HDS). An HDS is when a business develops or acquires new products unrelated to its core business but appealing to its current consumer markets. When a business focuses on just an HDS, undertaking within VI is considered less risky. I used HDS with my consulting business by adding a life and health insurance agency because I always encounter clients who inquire about insurance.
Another type of DS is the Conglomerate Diversification Strategy (CGDS). CGDS is when you gain a competitive advantage in your industry. You logically add non-related products to the business’s current operations. General Electric (GE) used CGDS as a business built from the invention of the light bulb and using electricity but bought other businesses that produced products, such as radios, refrigerators, wind turbines, and jet engines. Why would GE do that? Maybe they were suffering from declining annual sales and profits in a slow-moving market after saturation or possibly seeking financial synergy with businesses with creditable capital and a competent management team to succeed in the new industries. Regardless, GE capitalized on CGDS to remain a market leader in their relevant industries and remain the only business to remain on the Dow Jones Industrial Average from the original twelve.
VIs with DIs create a competitive advantage when you want to increase market share over your competitors. If your business operates in markets with scarce resources, VI and DI might be the key to simple survival. Want to be successful? Want to be different? Maybe VI and DI are your answers to operating in different markets by developing access to more distribution resources, processes, and production inputs to increase your business’ unique distinction.
I used VI to gain superior coordination and reduce risk for my consulting firm. My combination of leadership development and project/program management aims to gain superiority and reduce risk in my industries with my company, T-M-T Services International (TMTSI).
By Dr. No Days Off (Dr. NDO)