BUSI604 DISCUSSION: VERTICAL INTEGRATION 2
After reading the textbook, the term that interested me was vertical integration. This is a
particularly interesting concept to me, given my employment in manufacturing, specifically the
manufacturing of paper. The company that I work for used to be the biggest landowner in the
United States, behind the US government, simply because of the massive amount of forestland
that they managed. However, in 2006, the company agreed to sell 85% of its forestland, 5.1
million acres, for about six billion dollars (“International Paper”, 2006). This was a strategic shift
away from vertical integration, so I am curious to know the risks and benefits of vertical
integration.
By definition, vertical integration “extends a firm’s competitive scope within the same
industry by performing production activities normally provided by a supplier or distributor”
(Satterlee, 2023, p. 14, para. 3). A company that is entirely vertically integrated can control
everything from the raw material of a product to its final distribution. Theoretically, vertical
integration helps a company improve efficiencies, experience fewer supply chain interruptions,
and reduce costs since it controls more aspects of the supply chain. However, vertical integration
does create complexity within an organization's structure and reduces its flexibility. Additionally,
it can require a significant amount of capital investment to become vertically integrated, which
may not be available for many companies (Satterlee, 2023).
One company that is vertically integrated is ExxonMobil Corporation. The company was
formed in 1999 after a merger of Exxon and Mobil. The global corporation is functionally
organized into two operating divisions: upstream and downstream. The upstream division deals
with how the raw material comes into the company, which is summarized into three objectives.
The first objective is exploration or finding new reserves. The second upstream objective is the
development of capital projects to extract the oil, whether a new facility or an upgrade to an
BUSI604 DISCUSSION: VERTICAL INTEGRATION 3
existing refinery. The third objective of the upstream division is production, and this group is
responsible for the management and operation of the oil extraction. The second operating
division in the integrated operation chain is the downstream division. The downstream division is
responsible for refining the extracted crude oil into commodity products. The downstream
division also is responsible for the distribution and sales of the products it manufactures. By
vertically integrated, ExxonMobil and other oil companies have been able to ensure that there is
a constant supply of raw materials, that there is a consistent quality standard in the products, and
that operating costs are minimized. A significant benefit to high profits the corporation can
experience due to the low operating costs is the ability to invest in newer, more efficient, and,
most importantly, safer equipment for the manufacturers (“ExxonMobil”, 2021).
The analysis of ExxonMobil’s experience with vertical integration echoed the benefits
discussed in the textbook. By being vertically integrated, oil and gas companies like ExxonMobil
are able to improve their cost and production efficiencies with their control of the supply chain.
More so than many other industries, because of the volatility of oil prices, petroleum production
companies need to remain agile; for organizations to be successful, they must be agile (Rudy,
2022). Vertical integration helps to accelerate transformation when it is time to make
organizational changes, such as cutting costs or scaling operations. Additionally, as a global
business, ExxonMobil is able to smoothly handle international transactions with its control over
the supply chain (“ExxonMobil”, 2021).
From a comparison of the article, one of the reasons that was deduced as to why a
company might not vertically integrate is because of high capital investment to begin vertical
integration and the potential for high costs. With vertical integration, management structure is
complicated, and there is a chance that inefficiencies can arise from a lack of specialized
BUSI604 DISCUSSION: VERTICAL INTEGRATION 4
knowledge in a specific area (Day, 2023). Additionally, there are fundamental differences across
different industries, specifically based on demand and the flexibility required to be successful
with changing demand, that would determine if a company should vertically integrate or not.
Outside of the industries mentioned, one particularly interesting vertical integrated company is
Live Nation/Ticketmaster, which after their merger, controlled both the concert and the sales.
This integration, similar to ExxonMobil, leads to extremely high profits, both from increased
control of the industry and the low cost/absence of transaction costs between facets of the
corporation (Segal, 2010).
BUSI604 DISCUSSION: VERTICAL INTEGRATION 5
References
ExxonMobil Corporation’s Vertical Structure. IvyPanda. (2021, October 11).
https://ivypanda.com/exxon-mobile-corporations-vertically-integrated-structure/
International Paper to Sell Most of Its Forestland. (2006, Apr 05). New York Times (1923-)
https://go.openathens.net/redirector/liberty.edu?url=https://www.proquest.com/historical-
newspapers/international-paper-sell-most-forestland/docview/93266019/se-2
Jenkins, A. (2023, January 4). How does vertical integration work?. Oracle NetSuite.
https://www. netsuite.com/portal/resource/articles/erp/vertical-integration.shtml#:~:text=
Vertical%20integration%20can%20be%20difficult,and%20market%20insights%20and
%20more.
Rudy, K. (2022, October 18). Why continuous improvement is crucial for the oil and gas sector.
Minitab Blog. https://blog.minitab.com/en/continuous-improvement-oil-gas
Satterlee, B. C. (2023). International Business with Biblical Worldview. McGraw-Hill Education.
Segal, D. (2010, April 24). Calling almost everyone’s tune. The New York Times.
https://www.nytimes.com/2010/04/25/business/25ticket.html
Day, T. (2023, September 22). What are the challenges and opportunities of a vertical
integration growth strategy?. Vertical Integration: Pros, Cons, Types, and Tips.
https://www.linkedin.com/advice/0/what-challenges-opportunities-vertical-integration
Powered by TCPDF (www.tcpdf.org)
