Vertical Integration Strategies

In Chapter 10, Barney teaches the principles of vertical integration strategies.

Key definitions to understand:

Value Chain: "set of discrete activities that must be accomplished to design, build, sell, and distribute a product or service"

Vertical integration: "the number of stages in a product/service's value chain in which a firm engages"

The amount of value that the level of integration adds can be computed by using a formula the divides the value added by the level of integration minus net income and taxes by the amount of sales minus the net income and taxes, or in another way, value added is equivalent to depreciation plus amortization plus fixed charges plus income tax plus net income plus interest expense plus labor expense plus rental expense.

Of course the level of vertical integration that makes sense is industry and company specific often times.  While there would be significant cost-savings and benefits to controlling the process from point A through Z for some companies, the inability to focus efforts or the cost involved with all of the segments of the process can be detrimental for others.

In evaluating Monsanto, we find a good deal of vertical integration, however, they do not control every step of their production process.

Monsanto defines themself as "a sustainable agriculture company. We deliver agricultural products that support farmers all around the world."  (http://www.monsanto.com/whoweare/pages/default.aspx)

They provide genetically modified seeds (GMO), pesticides and herbicides (like Roundup), and also some traditional seeds as well.  They form and actively seek partnerships to aid them in the areas of the research and development of the GMO's (http://www.monsanto.com/sitecollectiondocuments/partnering-technology-focus-areas.pdf).   They contract out some of the seed production to various suppliers globally. They have also been a chemical company since their startup in the early 1900's and oversee that process.

Monsanto states that the companies that partner with them and work with them as a supplier must adhere to there values and serve with their mission to the globes farmers.  They list a variety of the companies that collaborate with them.