Amazon's Backward & Forward Vertical Integration
Similarly to how we previously discussed Amazon’s strategic
alliance with Whole Foods, Amazon has been practicing vertical integration on
several projects in the last few years. Like
their relationship with Whole Foods, they have leveraged their position in the
marketplace to take more ownership of their value chain and attempt to become
closer to their customer. Through their
endeavors, Amazon has exemplified both forward and backward vertical
integration.
Backward vertical integration is defined in our text as “when
firms increase the number of value chain stages in which they engage, and those
new stages move them farther away from a product’s or service’s ultimate
customer.” One way Amazon has executed
backward vertical integration is by taking more control and owning their own
warehouses for order fulfillment. Initially,
Amazon wished to be a company light on assets so Amazon would pass customer
orders to third party warehouses to fulfill and ship. Through the years, CEO Jeff Bezos came to be
aware that these third party warehouses, because not wholly owned and operated
by Amazon itself, was not fulfilling orders and delivering customer service to
the standard Amazon expected. From here,
Amazon took control of their own warehouses where they could oversee all
operations one stage further away from the customer, but due to their
dedication to excellence, the customer could feel the impact. This backward vertical integration has become
so successful for Amazon that they actually offer their warehouse and
logistical services to small businesses to help support their business through
Amazon’s tremendous power.
Now that we’ve discussed backward vertical integration, it’s
easy to understand that forward vertical integration is defined as “when firms
increase the number of value chain stages in which they engage, and those new
stages bring them closer to direct interaction with a product’s or service’s
ultimate customer.” One way Amazon has recently
executed forward vertical integration is through their various offering of
delivery services. While some delivery
services have been more successful and better accepted by customers, Amazon,
again, is taking control over its value chain and wanting to have more
integration into their customer’s experience.
With the delivery service offering, Amazon is taking a step closer to
their customer to deliver their order directly from the source. Instead of dealing with third party providers
like FedEx, UPS or the USPS, Amazon decided to not beat them and join
them. They began rolling out traditional
delivery services via delivery trucks and have since tested other services such
as delivery by drone and even offered a service where your Amazon delivery
person could have access inside your home to deliver your packages safely. Talk about taking one step closer to your
customer! While services like delivery
drones and inside home access were not as well accepted as the traditional
delivery services, Amazon succeeded in becoming one step closer to their
customer by owning the process of offering, fulfilling and delivery a customer purchase
from start to finish.
By Amazon’s several successful attempts to forward and
backward vertically integrate, it’s safe to say they want to have full control
over their customer’s total experience. While
it may seem like they control it all now and there’s nothing left to integrate,
one thing we know for sure is that Amazon never shows signs to slow down. Keep your eye out for the next vertical
integration from Amazon.
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