Retailer's Vertical Integration Strategy under Different Business Models: Forward, Backward, or No Integration?
LI Pei, WEI Hang, WANG Guang-yong, FU Na
2020, 28 (9):
With the development of the Internet, "new retail" has attracted widespread attention from the society. Vertical integration is one of the forms of "new retail" and has become an important strategy for retailers' transformation and upgrading. Because retailers need huge funds to integrate the whole supply chain, and there are few successful cases, most retailers will choose to integrate a single direction of firms in the supply chain.
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In practice, the direction of vertical integration is diverse, some retailers choose to forward integrate with service providers, whereas others opt to backward integrate with manufacturers. A forward integration strategy extends the retailer's functions to product service, tightening its connection with the consumer side, gaining revenue by provide services, but retailers need undertake the service cost. Conversely, a backward integration strategy stretches the retailer's operations toward production, tightening its control on the manufacturer side, reducing the intermediate process of production from production to sales and price competition, and increase profits by controlling the pricing power of products, but retailers need undertake the production cost. When retailers choose not integrate, they do not need undertake the cost of vertical integration, and the operational risk is also small. Moreover, these retailers who choose different vertical integration strategies have different business models: reseller model, platform model and hybrid model. The difference between these three different business models is mainly due to the contractual relationship between the retailer and the manufacturer, the way the retailer is profitable, and the pricing power of the product. These will inevitably affect the retailer's vertical integration strategy choice. Therefore, this paper mainly answers the following questions: should retailers choose vertical integration? if you choose vertical integration, what vertical integration strategy should retailers choose? how does the retailer's different business models affect its vertical integration strategy choices?
We consider a supply chains, consisting of two manufacturers, a retailer and a service supplier. Retailers have three business models: reseller model, platform model and hybrid model. The paper is organized as follows: considering the product competition, the retailers' profit in no vertical integration, forward integration, and backward integration is studied under the reseller model, platform model, and hybrid model respectively by builds a linear function model. Moreover, the conditions of the retailer's optimal vertical integration strategy are given by comparison the equilibrium profit in different situation, and the influence of potential demand, the coefficient of the product competition, commission rate are analyzed. Finally, the influence of different business models on the vertical integration strategy of retailers is studied.
The results show that: 1) with the increase of potential demand, in three different business models, the optimal strategy of retailers has changed from no vertical integration to backward integration to forward integration; 2) with the increase of competition between products, in reseller model and platform model, the retailer's optimal strategy from backward integrate to no vertical integration to forward integration, in hybrid model, the retailer's optimal strategy from backward vertical integration or no vertical integration to forward integration; 3) with the increase of commission rate, in platform model, the retailer's optimal strategy from forward integration to backward integration to no vertical integration, in hybrid model, the retailer's optimal strategy from forward integration or backward integration manufacturer 2 to no vertical integration to backward integration manufacturer 2.