Running head: VERTICAL INTEGRATION OF ZHANGZIDAO 1

Vertical Integration of Zhangzidao

Student’s Name

Institutional Affiliation
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Vertical Integration of Zhangzidao

Question 1

Zhangzidao’s exponential volume growth, advanced technology and management system,

strong capital capacity, and high-quality services entail that it is qualified to be the core

enterprise in China’s IFAP supply chain for implementing vertical integration.

Zhangzidao experienced a volume growth from 500 tons to 23,000 tons in a span of four

months in 2014. The storage facility’s close proximity to Dalian port, the largest port in

Northeast China, was the cause of this unprecedented growth rate. Its prime location gives

Zhangzidao a competitive advantage over its peers. It also bolsters the company’s supplier and

international trader links. The cold chain storage and logistics service enterprises act as a bridge

between the upstream suppliers and downstream buyers, making Zhangzidao an important link in

the supply chain.

Zhangzidao was the first cold chain storage enterprise to integrate the state-of-the-art

carbon dioxide circulation system. The advanced technology separates the company from its

competitors that still use primitive or conventional methods of cooling and storage. The

automatic shelves used in the facility ensure fast packaging and reduced delivery time. It is also

the biggest storage service in Northeast China. The company’s superior technology and storage

capacity contributed to its exponential growth rate during its inception. However, the effective

management of the facility also played a pivotal role in accelerating the volume of supply.

Zhangzidao invested ¥ 33 million in 2014 to expand the storage capacity and improve

technology. This entails that the company has the financial capacity to implement vertical

integration. Acquiring supply links permanently or contractually is a key aspect of vertical

integration. A lack of financial development may prevent firms that would like to vertically
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integrate from doing so (Acemoglu & Mitton, 2009). Having wealthy investors and an overall

strong capital allows the company to execute its integration strategy effectively.

High-quality service enhances the company’s profile and improves its potential to

persuade supply links during vertical integration. Zhangzidao is an ISO certified company that

has received accolades such as the titles of “Five-Star Cold Chain Logistics Enterprise” and

“Gold Medal Enterprise of China Warehousing Service”. This puts the company in a favorable

position to implement vertical integration.

Question 2

Technology, having some level of control and influence over the upstream and

downstream supply links, and effective capital management are the three driving forces for

Zhangzidao to implement vertical integration.

Holding technological superiority over its competitors will enable the company to retain

its reputation as the leading cold chain storage service in the market. It gives Zhangzidao the

credentials to be the core enterprise in China’s IFAP supply chain. Advanced technology implies

better facilities, improved packaging, and fast delivery. A study by Acemoglu et al. (2010)

concluded that vertical integration in industries was less likely when the supplying industry is

more technology intensive than the producing industry. Thus, having better technology and

equipment than the upstream links is essential for Zhangzidao to implement vertical integration

successfully.

Better technology and reputation in the industry also helps the company to assert control

and influence over its upstream and downstream supply links. Influence determines the power

the link has on the supply chain. If the suppliers have more influence than the buyers, they can

control the downstream supply chain. Moreover, if the buyers have more influence, the suppliers
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have to comply with the demands of the buyers. Thus, having influence in the market is vital for

Zhangzidao to improve its chances of acquiring partners.

Effective capital management is necessary while acquiring partners through contracts

or money deals. A strong capital and its proper management are the driving forces for a company

to vertically integrate. Zhangzidao has to either acquire partners in the upstream and

downstream, buy them, or build its link to execute its integration strategy. This is unattainable

without an effective capital management system.

International traders are likely to refuse or curb Zhangzidao’s integration efforts. They

have high bargaining power due to their connections to international sales channels, large capital,

and demand information pertaining to the downstream supply chain. They also held 50% of the

profits in the chain. Thus, they have a better chance at vertical integration than the rest of the

chain. Zhangzidao’s proposal has to be immensely lucrative for international traders to comply

with their integration strategy.

Question 3

Both forward and backward integration strategies have their share of advantages and

disadvantages. Forward integration enables the company to set prices, control the distribution

process, and “cut out the middle man”. Forward integration is an important tool for achieving

implicit price discrimination when explicit price discrimination is not possible (Perry, 1978). On

the contrary, backward integration helps to minimize costs, assert control and eliminate

competition. The integration method is determined by the nature and requirements of the

business. A company can implement forward, backward, or balanced integration strategies based

on their needs and expenditure.

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Forward integration focuses on the downstream of the supply chain. In the Chinese IFAP

industry, the downstream includes Chinese traders, aquatic products processing factories,

wholesalers, retailers, and consumers. Implementing a forward integration strategy would require

Zhangzidao to acquire factories, retail, and wholesale shops to control the distribution process.

This would also allow the company to set product prices and reduce distribution costs by

eliminating the middle man. Moreover, having its own distribution channel increases the

company’s control and influence in the supply chain as the dependency on third party

distributors is eliminated. However, forward integration through acquisition of distribution

channels requires an efficient and robust management system. The increase in responsibility also

increases the risks and need for impeccable management. Furthermore, merging the distribution

channels requires a hefty capital to acquire and manage individual supply links.

Backward integration focuses on the upstream of the supply chain. The upstream in the

Chinese IFAP chain includes foreign aquatic products suppliers and international traders.

Merging foreign suppliers and negotiating a deal with the international traders are two ways

Zhangzidao can implement backward integration. This will minimize the company’s

transportation costs, maximize control over the supply chain, and create barriers for potential

competition. However, this strategy requires substantial investments and convincing power to

vertically integrate suppliers and traders.

The third option is the balanced integration strategy. It combines forward and backward

integration by acquiring downstream and upstream links that are critical to the supply chain.

Technology Company Apple is an example of balanced integration. It is four companies in one,

controlling all the major critical parts of the chain used to make and sell products (Vergara,
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2012). This strategy requires huge investments and impeccable management but will maximize

the company’s net profit.

I would recommend a backward integration strategy if Zhangzidao decides to integrate

vertical integration.

Question 4

The key problems, capital capacity, and the supply chain structure need to be accessed

before deciding the method of integration. Zhangzidao’s key problems are low net profits and

low influx of fish during low season. The problems can be resolved by acquiring or merging

upstream links of the supply chain. The amortization costs due to the large investment in 2014

limits the company’s financial capacity to implement the balanced method of integration. The

electric charges were also high in 2016, eliminating the capacity to acquire and manage factories.

The lower tier of the chain (wholesalers, retailers, and consumers) is saturated; therefore, they do

have substantial bargaining power. Thus, the analysis of the company problems, capital, and

structure indicates that the backward method of implementation is the best option for vertical

integration.

Zhangzidao’s main problem that compelled CEO Wu to address the need for vertical

integration was low net profits. In 2014 and 2015, the company’s net profits were negative. In

2016, the profit was negligibly small. Foreign aquatic suppliers and international traders acquired

10% and 60% of the chain’s profit respectively. Thus, the upstream links are critical for

integration. The company must provide lucrative incentives to the traders and suppliers that will

benefit all the companies involved. Every partnership should have an exchange of value, whether

monetary or non-monetary (Burns, 2019). Zhangzidao should assure its supplying and trading

partners that their partnership will result in the IFAP industry’s economic prosperity. This word
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of assurance is the leverage point that the company can use to earn the trader’s trust and

approval. Zhangzidao’s actions in the future will determine the effectiveness of the partnership.

The company can also control the influx of fish during low seasons after acquiring

foreign aquatic suppliers. The supply rate can then be matched with the constant rate of demand

throughout all seasons.

Zhangzidao’s backward integration strategy requires medium investment that is within

the company’s financial capacity. However, it will solve the company’s key problems and aid in

its economic growth.

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References

Acemoglu, D., Johnson, S., & Mitton, T. (2009). Determinants of vertical integration: Financial

development and contracting costs. The Journal of Finance, 64(3), 1251-1290. Retrieved

from www.jstor.org/stable/20488001

Burns, S. (2019). How to use strategic partnerships for faster growth. Retrieved 12 August 2020,

from https://www.forbes.com/sites/stephanieburns/2019/03/29/how-to-use-strategic-

partnerships-for-faster-growth/#4ee58bb73c6a

Perry, M. (1978). Price discrimination and forward integration. The Bell Journal of Economics,

9(1), 209-217. doi:10.2307/3003621

Vergara, R.A. (2012). Samsung Electronics and Apple, Inc.: A study in contrast in vertical

integration in the 21st Century. American International Journal of Contemporary

Research, 2(9), 77-81. Retrieved from

www.researchgate.net/publication/303860146_Samsung_Electronics_and_Apple_Inc_A_

Study_in_Contrast_in_Vertical_Integration_in_the_21_st_Century