Chapter 10: Vertical Integration Strategies

Vertical integration is the process by which a company is responsible for producing all of the components that make up the end product which is eventually sold in the marketplace. A good example of a company that practices vertical integration is Apple. Apple which is responsible for some of the most popular technological products on the market (iPad, iPhone, iWatch) has become very successful adopting this model where they manufacture the pieces that comprise these items and sell the end product. However, Apple does not assemble these items.

Although the idea to vertical integrate may work for Apple, it does not seem as if this strategy would be ultimately lucrative for an restaurant such as Chipotle. Restaurants are continually patronized due to their excellent customer service and fare. Understandably, one cannot manufacture service; therefore, Chipotle is a bad candidate for this approach. However, one can produce food items that can be fashioned into the ingredients needed to service the restaurant's menu. Let us explore the lucrativeness of this possibility.

For Chipotle to take over the daunting task of manufacturing the products that go into making their entrees, they would need to manage and service several ranches/chicken farms, dairies, and several thousands of acres of farmland to keep up with demand. Also, they would need to acquire several warehouses or refrigerated storage facilities to keep the products cool until ready for transportation. Additionally, Chipotle would have to spend more money on transportation and logistics costs to get the products from the manufacturing site to the restaurants.

The extra costs listed above would be associated with a majority of restaurants that would attempt to vertically integrate their companies. However, Chipotle would have even more of an added expense as they are wholly devoted to GMO and hormone free/organic meats and produce. So the extra care and resources needed to produce items up to those specifications is even more of an expense that would be leveraged against the financial success/profits of the restaurant in itself, potentially resulting in a loss of money due to issues such as food spoilage and other issues associated with organic farming.

While vertical integration worked for Apple, that is not the accurate for all manufacturers of high ticket items. General Motors, one of the largest auto manufacturers in the world operated in a fashion that is the reverse of Apple in the assembly department as they were only responsible for the manufacturing and creative process of the vehicle. If they were to take on the responsibility of manufacturing the parts as well, it could increase the operational cost beyond the limits of profitability. Other companies in the region would relish the opportunity to partner with these mega companies so as they can have a steady revenue stream.

Ultimately, vertical integration works for some as a strategic process. There's no definitive indicator as to the type of company that should try to adopt this approach.

Chipotle Mexican Grill - Expansion and Growth Strategies

Owning your Supply Chain - Lessons from Chipotle Grill's Antibiotic-Free Beef Dilemma

There Aren't Enough "Naturally Raised" Cows to Meet Chipotle's Demand