My Chains Are Mine—Vertical Integration


The previous post discussed supply chains and their management, with a concluding question about supply chain leadership among disparate participants. The continuum, from obtaining raw materials to putting finished offerings into consumers hands, falls under unambiguous control when a single entity takes direct ownership of a supply chain’s multiple members. This marketing strategy is known as vertical integration.

Picture the companies required to create and distribute an offering “stacked” above or below a parent organization. That parent may occupy any level of the supply chain—a retailer representing the final marketing stage dealing with consumers, a manufacturer building the actual offering, a producer of raw materials such as an energy company that extracts crude oil destined for refinement, distribution and eventual sale as fuel.

Vertical integration can move in two directions—forward or backward, designated by the “proximity” of the acquired chain member to direct interaction with the consumer and “consumption” of the marketing offering. The healthcare industry can provide clear examples. A health insurance company acquiring clinics delivering medical services to patients is engaged in forward integration, getting “closer” to the end-user experience. An orthopedic surgeon group acquiring an implant manufacturer is engaged in backward integration as prosthesis design and construction is farther removed from patients than the actual surgery to replace joints.

Advantages to vertical integration include independence from suppliers, cost control, and increased product knowledge/marketability. Having more offerings is an obvious driver for the recent union of CVS, America’s largest pharamacy chain, and Aetna, the number-three health insurance company. As the linked article points out, the new company wants to be a “first-line health care hub,” providing a spectrum of healthcare services including patient treatment in the MinuteClinics found in CVS retail locations. Such totality represents simultaneous backward and forward integration—insurance is backward integration for CVS, a company that deals directly with patient/customer interactions; retail is forward integration for Aetna as they are now involved with patients/customers receiving the prescriptions and provider care facilitated by their coverage.

There are concerns the additional advantage of cost control will benefit the new mega-company but not patients/customers. Note in the linked article the role of the Department of Justice in approving the CVS/Aetna merger to preclude a monopoly that could keep prices unnecessarily high due to reduced marketplace competition. For the Christian marketer, vertical integration must ultimately benefit the consumer through peak outcomes across the marketing mix—product, place, price, promotion.

Deuteronomy 8:18 NIV

But remember the Lord your God, for it is he who gives you the ability to produce wealth, and so confirms his covenant, which he swore to your ancestors, as it is today.

How can Christian marketers make sure customers receive benefits from vertical integration?

How can the CVS/Aetna merger address challenges in healthcare? How can Christian marketers treat service to healthcare customers as a ministry?

Supply chain image: David pogrebeshsky, Supply chain networkCC BY-SA 4.0

CVS image: Masrur Odinaev, CVS-pharmacy – panoramioCC BY-SA 3.0

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