Vertical Integration

Backward Integration

Backward vertical integration refers to the ownership or control of businesses or processes backward or upstream in the value chain. Backward integration includes businesses that produce any or all of the inputs used by the organization that initiates the integration. Businesses use backward vertical integration to meet a variety of objectives, including to ensure adequate supply levels, to provide quality assurance, and to control technology.

Food processors, for example, use backward vertical integration to reduce costs by controlling supply levels, assuring quality, managing logistics (i.e., the movement or flow of products and resources), and increasing overall efficiency. For example, the chicken operation at Tyson Foods, Inc. (a food-processing company) has backward vertically integrated all stages of chicken production and processing. The six stages of chicken production that occur before the primary processing of their core business allow Tyson to achieve cost reductions from supply coordination, improved genetics, and other technologies that increase efficiency and food safety. These six stages of backward vertical integration are described on Tyson’s website:

• 1.
  Breeder flocks: Cobb Vantress, a Tyson Foods, Inc., subsidiary, provides breeding stock and is able to create efficiencies for the vertically integrated company by selective breeding, adapting technologies, and generally matching its output to the needs at the next stage of production.
• 2.
  Pullet farms: These farms produce the chickens that will lay the eggs for the broiler chicken.
• 3.
  Breeder houses: Pullets lay eggs.
• 4.
  Hatcheries: Eggs are hatched, and the chicks are sent to broiler farms.
• 5.
  Broiler farms: Approximately 6,500 contract growers (farmers) feed and care for the chicks according to Tyson Foods, Inc., standards. When they reach the desired weight, they are taken for primary processing.
• 6.
  Feed mills: Chicken feeds that are scientifically formulated to optimize pullet and broiler production are developed and produced in mills owned by Tyson Foods, Inc. Feed quality affects the cost of feed and the efficiency of the growing chickens. Feed quality and cost are major considerations in poultry production because chicken is the most efficient converter of feed to meat protein.

An interesting example of backward vertical integration for supply assurance can be found in the quick-service (or fast food) restaurant industry. When McDonald’s began operations in Russia in 1990, it had to build a proprietary factory to supply the 300 ingredients typically needed by a single McDonald’s restaurant at that time, including frozen fries, pie filling, and buns. Today, McDonald’s has reduced the degree of vertical integration and uses contracts with independent suppliers to obtain most of its ingredients in Russia, as it does in other countries where the company conducts business.

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