They are all vertically integrated. Vertical integration is a business model that controls the supply chain process, from manufacturing to sales.

Starbucks’ vertical integration model allowed the coffee chain to maintain a 10.1% market share. The company could ethically source 99% of its Arabica beans by managing its own supply chain.

Zara runs a vertical integration model that includes design, manufacturing, marketing, and sales. As a result, Zara can meet consumer demands in a short amount of time and respond quickly to market demands.

A McKinsey survey revealed that companies in Africa that vertically integrate have a higher chance of overcoming business challenges. Companies can vertically integrate in three ways – forward, backward or balanced.

• Backward integration happens when a company sets up a new company or acquires another company to gain control of the production process. For example, you are backwardly integrated if you own a fast-food chain and produce the raw materials you use.
• Forward integration involves taking control of a business’s distribution or retail aspect. When companies integrate forward, they take a more customer-facing role. For example, the fashion line Zara sells directly to the public through its retail outlets. 
• Companies can also choose a balanced integration approach — a forward and backward integration mix. For example, Starbucks is involved in coffee bean farming, the roasting process and controls the retail distribution chain.

Vertical integration in Africa Many businesses have embraced the vertical integration model to keep quality, timing, and cost under control in the African market. For example,  SABMiller has brewing, soft drinks, and bottling operations. Dangote Group producers of Dangote cement set up a bagging company.  

Dangote Cement has benefited from its backward integration policy. The integration significantly reduced the cost-revenue ratio and contributed to Dangote Cement’s  45% market share in sub-Saharan Africa. 

My company, AfricaWorks, is a coworking operator, but we had to integrate with Haussmann Africa (now AfricaWorks Studios) to handle design, project management, cost management, and fit-out to control quality, time and prices. 

We lowered our supply risks by vertically integrating, preventing future supply shock. As a result, we delivered high-quality results at an affordable price using only the best quality materials and finishes, fine design, premium furniture, and accessories.  

Through vertical integration, we have been able to open twice as many AfricaWorks spaces in multiple cities across Africa within a short time. Being vertically integrated has allowed us to reduce our capital expenditure cost per workstation to 50% lower than our competitors.

It is good to keep in mind that vertical integration can be risky. The strategy can be capital intensive, and companies risk spreading too thin. 

Assess the Risks

Vertical integration is good for businesses that suffer from unstable or erratic supply markets, which can stem from wild price fluctuations or raw material shortages.

For example, Nutella integrated vertically and, in so doing, acquired 25% of the world’s hazelnut supply. Like Nutella, vertically integrating gives businesses a fighting chance to smooth out bumps in the road. 

But before integrating, you must carefully assess and compare historical price volatility, other causes, and the future impacts of the unstable supply.  

Ultimately, Vertical integration allows a business to achieve greater economies of scale. By integrating bi-directionally into the supply chain, companies can minimise costs while scaling up production. This increases supply, lowers fixed and variable costs per unit and improves consumer appeal.

Inc