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Questions and Answers
Explain how backward vertical integration can benefit a company beyond just securing supply. Provide an example from the text.
Explain how backward vertical integration can benefit a company beyond just securing supply. Provide an example from the text.
Backward vertical integration allows a company to eliminate the profit margin taken by suppliers, potentially increasing profitability. An example is Ermenegildo Zegna acquiring Achill Farm to control the supply of merino wool and maintain quality.
What are the financial advantages for a manufacturer that result from owning its distribution channels?
What are the financial advantages for a manufacturer that result from owning its distribution channels?
Owning distribution channels allows the manufacturer to capture the profit margins that would otherwise go to distributors. This can improve the company's bottom line and increase overall profitability.
Describe the potential benefits of a luxury brand directly owning farms or animal suppliers. How does this relate to ethical standards?
Describe the potential benefits of a luxury brand directly owning farms or animal suppliers. How does this relate to ethical standards?
Luxury brands can ensure higher ethical standards by monitoring production for environmental regulations and animal welfare. It helps them control the quality and origin of materials, reinforcing the brand's image and avoiding supply chain issues.
Using the example of JAB's purchase of Dr Pepper Snapple, explain how acquiring a distribution network can challenge established market leaders.
Using the example of JAB's purchase of Dr Pepper Snapple, explain how acquiring a distribution network can challenge established market leaders.
What is forward vertical integration? Give a hypothetical example.
What is forward vertical integration? Give a hypothetical example.
Flashcards
Vertical Integration
Vertical Integration
Acquiring operations in different stages of product creation.
Backward Vertical Integration
Backward Vertical Integration
Acquiring a company that supplies raw materials or components.
Forward Vertical Integration
Forward Vertical Integration
Acquiring a company involved in distributing the product.
Motive for owning supply chains
Motive for owning supply chains
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Motive for owning distribution networks
Motive for owning distribution networks
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Study Notes
- Cross-border business partnerships are formed so companies can access supply chains and distribution networks.
- Vertical integration is when a business acquires operations in different stages of product production.
- Backward vertical integration occurs when a business acquires a supply chain.
- Forward vertical integration occurs when a business acquires a distribution network.
Supply Chains
- Businesses take over operations in the supply chain to guarantee supply.
- Businesses prefer to control the supply chain to reduce uncertainty and maintain quality.
- Another motive is to eliminate the profit margin taken by suppliers.
- Luxury brands are buying farms to secure critical materials, maintain ethical standards, and ensure environmental regulations are met.
- Ermenegildo Zegna, an Italian luxury menswear brand, took control of Achill Farm in Australia to protect the supply of merino wool for suits and sweaters.
- Hermes owns an alligator farm in Louisiana and two crocodile farms in Australia.
- LVMH has bought the Johnstone River crocodile farm in Queensland, Australia.
Distribution Networks
- The main motive for buying distribution networks is to guarantee outlets for produce.
- Manufacturers reduce risk and operate confidently when they can immediately sell output through owned distribution channels.
- Ownership of distribution channels moves profit margins to the manufacturer, improving the bottom line.
- In 2018, JAB, a German family-owned investment company, purchased Dr Pepper Snapple for $19 billion.
- The purchase created a competitor for Coca-Cola and Pepsi.
- Some experts argue JAB made the purchase for distribution reasons.
- Coca-Cola, Pepsi, and the Dr Pepper networks have dominated access to the US soft drinks market.
- The Dr Pepper acquisition provides JAB with a bottling and distribution network to sell a variety of drinks.
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Description
Cross-border business partnerships allow companies to access supply chains and distribution networks. Vertical integration occurs when a business acquires operations in different stages of product production. Businesses take over supply chains to guarantee supply and reduce uncertainty.
