A01 chaf6542 06 se fm indd

  2 

The extent of vertical integration. How far should the company take downstream or 

upstream vertical integration? Originally car manufacturers had a high degree of vertical 

integration, but more recently they have moved from a wide process span to a narrow 

process span.

Vertical integration

The extent to which 

supply chain activities 

are undertaken and 

controlled within the 

organisation.

Virtual integration

The majority of supply 

chain activities are 

undertaken and controlled 

outside the organisation 

by third parties.

Figure 6.10

The characteristics of vertical integration, vertical disintegration 

and virtual integration

Applications:

• Specialised or

proprietary

production

Application:

• Cost reduction

 and focus on

 core capabilities

Application:

• Rapid market

 penetration

 (dot-com approach)

Characteristics:

• Majority of

manufacture in-house

• Distant relationships

with suppliers

Characteristics:

• Move to

outsourcing

• Network of

suppliers

Characteristics:

• Total reliance on

linked third parties

• Close relationships

with suppliers

Vertical

integration

Virtual

integration

Vertical disintegration

(disaggregation)

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Part 2  Strategy and applications

  3 

The balance amongst the vertically integrated stages. To what extent does each stage 

of the supply chain focus on supporting the immediate supply chain? For example, if a 

supplier to a motor manufacturer also produced components for other industries this 

would be an unbalanced situation.

Combining these concepts, we can refer to a typical B2B company 

(Figure 6.5). If it owned the majority of the upstream and downstream 

elements of the supply chain and each element was focussed on sup‑

porting the activities of a B2B company, its strategy would be to follow 

upstream and downstream directions of vertical integration with a wide 

process span and a high degree of balance. Alternatively, if the strategy 

were changed to focus on core competencies it could be said to have a 

narrow process span.

How, then, can electronic communications support these strat‑

egies? Through increasing the flow of information between mem‑

bers of the supply chain, a strategy of narrower process span can be supported by 

e‑commerce. However, this relies on all members of the supply chain being e‑enabled. 

Companies undertaking offensive or defensive strategies will be in a better position to 

stipulate adoption of e‑commerce, and so increase the overall efficiency of the supply 

chain. As we saw in Case study 6.1, a company such as Shell helps e‑enable the supply 

chain by sharing information in its own databases with customers to increase the effi‑

ciency of the supply chain.

Our next example in the manufacture of personal computers also illustrates the concept 

of the two different supply chain products. Complete Activity 6.2 to review the benefits of 

each approach.