Vertical integration is a classic business tactic: Why just own the chicken farm when you can own the trucks that transport the chickens as well as the restaurant that serves the chicken. The benefits are that you can control your entire supply chain so if one business isn’t doing amazingly then you have the opportunity to supplement your income in the other businesses.
Here are some other benefits:
- Lower costs due to eliminated market transaction costs
- Improved quality of supplies
- Critical resources can be acquired through VI
- Improved coordination in supply chain
- Greater market share
- Secured distribution channels
- Facilitates investment in specialized assets (site, physical-assets and human-assets)
- New competencies
The downsides are fairly dire: you can spend so much time diversifying your workforce and strategy that all your businesses fall apart. If done wrong, vertical integration could result in multiple failures. Here’s a great diagram on the topic:
In digital and specifically in South Africa we’ve not seeing much in terms of vertical integration. The only example I can think of in recent history is that of Mr Delivery being bought by Takealot in order to secure their distribution chain. In my mind this was a brilliant move as delivery is the weakest point of e-commerce businesses in South Africa. Again though, I can’t think of much more.
It would be interesting to see an agency in South Africa buying another, smaller agency in order to secure production or buying a media outlet to ensure preferential rates.
Fundamentally we’ve got an industry that’s still finding its feet so it’s going to be tough to start investing up or down your supply chain. The reality is that if I were a large digital business, I’d be jumping on opportunities such as this as it’s still cheap to buy into the digital industry.