Archetype
See also: Layer Player, Orchestrator
| Key Partners | Key Activities | Value Propositions | Customer Relationships | Customer Segments | |||||
| Key Resources | Channels | ||||||||
| Cost Structures | Revenue Streams | ||||||||
How: Be in command of most of the value-adding steps to allow optimizing the flow of value creation from first resource to final product.
Why: Economies of scope, lower transaction costs and dependencies on external suppliers result in lower costs and increased stability of value creation.
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The Integrator business model involves a company taking control over most or all aspects of the supply chain. This includes participating in various stages of the production process, such as sourcing raw materials and managing distribution. This level of control allows the company to increase efficiency and economies of scale.
- Decreased Dependence on Third-Party Suppliers. By managing the supply chain in-house, the company can avoid delays caused by reliance on external suppliers. This reduction in reliance can lead to cost savings for the firm.
- Customized Value Chain. The Integrator model allows the company to tailor the value chain to the specific needs and processes of the industry. This customization can reduce transaction costs and enable more efficient value creation, such as through shortened transportation times or improved coordination of intermediate products.
- Enhanced Market Agility. The Integrator model can also enable the company to respond more quickly to market changes. This enhanced market agility can be a significant advantage for the firm.
One potential downside of the Integrator model is that the company may miss out on opportunities for specialization by outsourcing certain tasks to specialized suppliers.
The supply chain process begins with the purchase of raw materials from a supplier and ends with the sale of the final product to the customer. Vertical integration involves a company taking control of two or more steps in this process, such as buying its suppliers to reduce manufacturing costs, investing in retail by opening websites and physical stores, or investing in warehouses and distribution networks. These steps require a significant investment of capital and can increase the size and complexity of the company’s operations.
Where did the Integrator business model pattern originate from?
The Integrator model emerged during the industrialization of the early nineteenth century, as the first large international companies were founded. These firms sought to integrate their operations in order to maximize their market power and secure access to essential resources and distribution channels.
One of the earliest pioneers of the Integrator model was Carnegie Steel, a US-based company founded by Andrew Carnegie in 1870. Carnegie Steel became the second largest steel mill in the world by taking control of strategically important iron ore mines and the entire value chain of the steel industry. In addition to acquiring coal mines and furnaces, which were necessary for steel production, Carnegie Steel built a proprietary railway network to support its operations. In 1901, Carnegie Steel was sold to the United States Steel Corporation for a sum equivalent to approximately $10-11 billion in 2014. This allowed the United States Steel Corporation, which also had a heavily vertically integrated value chain, to become the global leader in the steel market.
Applying the Integrator business model
Integration in the downstream value chain can offer the advantage of higher margins. By bringing together different suppliers to create a one-stop solution, a company can meet the growing demand of customers for comprehensive offerings.
Integration can also provide a better understanding of the entire value chain. This understanding can be useful for companies seeking to follow in the footsteps of companies like 3M, which have successfully integrated different suppliers to create their offerings.
In order to succeed with an Integrator model, it is important to build a broad knowledge base. However, this may come at the cost of sacrificing specialization and depth in certain areas.
Vertical integration
Vertical integration can take a number of different forms, including backward integration, forward integration, and balanced integration.
- Backward Integration. Backward integration occurs when a company takes control of earlier stages of the supply chain or production process. This can involve acquiring raw material distributors or providers closer to the beginning of the supply chain. For example, a furniture manufacturer might try to bring wood sourcing in-house by acquiring a wood distributor.
- Forward Integration. Forward integration involves a company expanding by gaining control of the distribution process and sale of its finished products. For example, a clothing manufacturer might open its own stores rather than selling its finished products to a middleman who sells them in smaller batches to individual retailers. Forward integration is less common because it can be difficult for companies to acquire other companies further along the supply chain.
- Balanced Integration. Balanced integration is a form of vertical integration in which a company merges with both companies before it and after it along the supply chain. This requires the company to manufacture a good and both source raw materials and work with retailers to deliver the final product. For example, if Coca-Cola were to merge with both its raw material providers and retailers who sell its products, it would be engaging in balanced integration. Balanced integration is the most costly and risky form of vertical integration, but it also has the greatest potential upside as the company has greater control over the entire supply chain process.
Vertical integration can reduce costs and create a more efficient supply chain, but it also requires significant capital expenditures.
Vertical Integration vs. Horizontal Integration
Vertical integration involves a company taking control of key components of the supply chain that it has previously contracted out. This can reduce costs and give the company greater control over its products, ultimately leading to increased profits.
Horizontal integration, on the other hand, involves the acquisition of a competitor or a related business. A company might pursue horizontal integration in order to eliminate a rival, improve or diversify its core business, expand into new markets, or increase its overall sales.
While vertical integration involves a company becoming more involved in a single process along the supply chain, horizontal integration is a more focused approach that allows a company to become more specialized or niche within a particular market. For example, instead of engaging in all aspects of the supply chain from materials sourcing to manufacturing to retail, a company might choose to specialize in only one of these areas by acquiring similar companies through horizontal integration.
When is it advantageous to be an Integrator?
The Integrator business model can be advantageous to implement compared to the Layer Player and Orchestrator business models for several reasons.
- One-stop-shop. By bringing together different components or services from multiple suppliers, an Integrator can provide a complete solution for customers, which makes it convenient for them to access all the services they need from one place.
- Increased customer value. By providing a complete solution, an Integrator can increase the value that they provide to customers. This can lead to increased customer loyalty and higher customer lifetime value.
- Greater control over the supply chain. By bringing together different components or services from multiple suppliers, an Integrator can have greater control over the supply chain, which can make it easier for them to coordinate activities with other companies and partners.
- Increased efficiency. By providing a complete solution, an Integrator can increase the efficiency of the value chain. This can lead to cost savings and increased productivity.
- Differentiation. By providing a unique combination of services and solutions to customers, an Integrator can differentiate itself from competitors.
- Revenue streams. By acting as intermediary, the Integrator can generate revenues from multiple sources such as commissions, transaction fees, and subscription fees.
Unlike the Layer player, the Integrator business model is about bringing different components or services together and unlike the Orchestrator, it provides the complete solution to the customers.
When is it better to take on another role in the value chain?
Implementing the Integrator business model can be challenging due to its high capital investment, complexity, risk of missing out on opportunities for specialization. It requires a significant investment of capital and a high degree of coordination and communication to manage and control the complexities.
- High Capital Investment. Implementing the Integrator business model requires a significant investment of capital as it involves taking control of multiple steps in the supply chain process such as buying suppliers, investing in retail, and building proprietary logistics network.
- Complexity. Integrating different steps in the supply chain process can increase the size and complexity of the company’s operations, making it difficult to manage and control.
- Risk of missing out on opportunities for specialization. By taking control of multiple steps in the supply chain process, the company may miss out on opportunities for outsourcing certain tasks to specialized suppliers.
- Dependence on customers. As an Integrator, a company may be dependent on the demand and preferences of customers. This can make them vulnerable to changes in customer needs or preferences.
Examples
Live Nation and Ticketmaster
The vertically integrated entertainment company represents artists, produces shows, manages venues, and sells event tickets.
Apple Inc.
Apple operates retail locations to sell its products as well as manufacturing facilities around the globe.
Netflix
The company started as a DVD rental business before moving into online streaming of films and movies licensed from major studios. However, Netflix eventually decided to produce its own original content, such as the hit shows Grace & Frankie and Stranger Things. By producing its own content, Netflix was able to improve its margins and have more control over the entertainment development process.
Source: Vertical Integration Explained: How It Works, With Types and Examples
Amazon
An example of pursuinng backward integration. The company started as an online retailer of books that it purchased from established publishers. However, it eventually became a publisher itself and introduced its own private label, Amazon Basics, to sell branded products directly to consumers.
Source: Vertical Integration Explained: How It Works, With Types and Examples
Ford Motor Company
Ford Motor Company revolutionized vertical integration in the automotive industry by bringing the production of many previously externally sourced components in-house to mass produce vehicles more efficiently. Its acquisition of a steel mill also integrated steel production directly into the company.
Zara
Spanish fashion retailer Zara has vertically integrated its business model by designing and producing the vast majority of its apparel and accessories in its own factories, allowing it to respond quickly to changing fashion trends and varying demand. This has made Zara one of the most innovative and successful companies in the fashion industry.
Exxon
Exxon Mobil is a highly vertically integrated oil and gas corporation, with a value chain that encompasses oil production, processing, and refining. It owns hundreds of subsidiaries and is the largest company in the world by revenue.
Würth
The worldwide wholesaler that offers a wide range of products, including fasteners, screws and screw accessories, dowels, chemicals, furniture and construction fittings, tools, machines, installation material, automotive hardware, inventory management, and storage and retrieval systems. It also has a strong focus on research and development and has secured over 60 patents. Würth has over three million B2B customers.
Trigger Questions
- Can vertical integration provide competitive advantages and improve profit margins?
- How will you secure a broad enough knowledge base to integrate the value chain successfully?
- Will you risk losing depth and specialization
- Will we experience benefits in terms of managing complexity, IT systems, and technical proficiency by integrating additional endeavors?
This business strategy is part of the Business Model Patterns printed card deck.
Proven business models that have driven success for global leaders across industries. Rethink how your business can create, deliver, and capture value.
Get your deck!Related plays
- Business Model Navigator by Karolin Frankenberger and Oliver Gassmann
- Vertical Integration Explained: How It Works, With Types and Examples by Investopedia
