Amazon's Backward Vertical Integration Strategy

Every company has a value chain (the set of discrete activities that must be accomplished to design, build, sell, and distribute a product or service) and each activity listed in the value chain must be accomplished in order for the product to be sold to customers. Firms can decide which of those activities they engage in, and which other firms can engage in. The greater the number, the more vertically integrated the firm is.

Vertical integration occurs when a customer either buys or starts a company and integrates it into their current business. Note that this number doesn't have to remain constant over time; companies can engage in forward vertical integration (getting closer to the end customer) or backward vertical integration (getting farther from the end customer).

One of Amazon's biggest value chain moments was when they decided to revolutionize the digital books business by exclusively publishing books aimed at its Kindle platform. In this move, Amazon successfully removed the publishing houses, or "middle men," from the process. By owning this piece of the value chain, Amazon would be handling every step of a book's life cycle after it's been written (editing, producing, marketing, selling, and even providing the device needed to read it.), and thus redefining how customers interact with and relate to e-books.

Using this backward vertical integration as a source of competitive advantage can be hard, but Amazon (even through backlashes from Apple and other book retailers) can tell the value added as a percent of sales (which is the best way to tell the success in any act of vertical integration). By creating a user experience that completely changed the way users interact with and relate to e-books, Amazon has the chance to own the market and drive the future of e-books commerce.

Will this move guarantee Amazon a number one position in the seller of e-books? They currently have a seventy percent market share, but there are still competitors, like Barnes & Noble's Nook that is undergoing vertical integration of their own. This leads to the bigger question: How else will the internet affect other companies' value chains?

Sources

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• Moving Into the 3rd Dimension of Vertical Integration by Nurun Team [http://www.nurun.com/en/our-thinking/future-of-retail/moving-into-the-3rd-dimension-of-vertical-integration/]
• Amazon, Apple, and the Perils of Vertical Integration by Tim Worstall [http://www.forbes.com/sites/timworstall/2012/04/23/amazon-apple-and-the-perils-of-vertical-integration/]
• Amazon Your Industry: Extracting Value from the Value Chain by Booz and Company [http://www.strategy-business.com/article/10479?gko=7b809]