Carnegie and the Steel Industry: Vertical Integration

1. The owner of Carnegie Steel Company, Andrew Carnegie, pioneered the use of vertical integration. Vertical integration is a system of related businesses in which a parent company owns its suppliers. Back then the railroads needed steel for their rails and cars, the navy needed steel for their new naval fleet, and the cities needed steel to build their skyscrapers. When Andrew Carnegie saw this demand he took advantage of it. When Carnegie started his steel company he started with a very little amount of money so in order to pay less to manufacture the steel and increase his profits, Carnegie bought out companies that provided raw materials like iron, which is one of the main components of steel. He bought out coal companies as well because it was needed to heat the furnaces that were used in the Bessemer process. Not only did he buy products to produce his steel, he also bought railroads so he could ship his steel at a much lower cost. He was able to beat out competitors by producing his steel cheap and efficient that everyone chose to buy form him and not anyone else.

2. McDonalds uses a backwards-vertical integration because the company expands its operations into industries that produce inputs to the McDonalds products. Their second- tier suppliers like ink, paper and cardboard link to their first- tier suppliers that are packaging suppliers. Their second- tier suppliers that are farmers link to their first- tier suppliers that fruit vegetable, and cheese suppliers. Water and sugar are also second- trier suppliers that link to their first- trier supplier, which is Coke. This makes their business more profitable by buying their suppliers instead of buying from suppliers, this saves the money and time by not always having to buy expensive products from suppliers because they own what they need and they don’t have to compete with other businesses to get what they need. Since they have vertical integration they are hard to compete with because they provide