Running Head: Vertical Integration of Zhangzidao 1
Running Head: Vertical Integration of Zhangzidao 1
Running Head: Vertical Integration of Zhangzidao 1
Student’s Name
Institutional Affiliation
VERTICAL INTEGRATION OF ZHANGZIDAO 2
Question 1
strong capital capacity, and high-quality services entail that it is qualified to be the core
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
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. A lack of financial development may prevent firms that would like to vertically
VERTICAL INTEGRATION OF ZHANGZIDAO 3
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
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
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
VERTICAL INTEGRATION OF ZHANGZIDAO 4
have to comply with the demands of the buyers. Thus, having influence in the market is vital for
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
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
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
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
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
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.
controlling all the major critical parts of the chain used to make and sell products (Vergara,
VERTICAL INTEGRATION OF ZHANGZIDAO 6
2012). This strategy requires huge investments and impeccable management but will maximize
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
the company’s financial capacity. However, it will solve the company’s key problems and aid in
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,
Vergara, R.A. (2012). Samsung Electronics and Apple, Inc.: A study in contrast in vertical
www.researchgate.net/publication/303860146_Samsung_Electronics_and_Apple_Inc_A_
Study_in_Contrast_in_Vertical_Integration_in_the_21_st_Century