Smithfield’s vertical integration strategy helped it secure a $4.7 billion agreement with Shuanghui, a large Chinese meat-processing company. The American company is the largest pork and hog producer, which receives its products from private farmers and creates employment opportunities. The following essay will discuss the role of Smithfield’s vertical integration strategy in the deal with Shuanghui and explain the reasoning behind the decision to build a vertically integrated production model.
Vertical integration eliminated the risks and disruptions associated with unreliable suppliers and responded to the demand for high-quality imported products in China. The strategy also increased the company’s profitability and allowed Smithfield to guarantee food safety, which attracted Shuanghui, which recognized the demand for safe and antibiotic-free pork products in Mainland China. Moreover, the GHM concept explains that if assets are complementary, then integration is optimal, and the assets can operate under separate ownership, which is the case of Smithfield’s acquisition. The PRT approach to vertical integration suggests that the strategy entails transaction costs and underinvestment, lowering the investor relationship’s surplus. Thus, vertical integration increases the bargaining power of integrated agents and reduces the power of suppliers.
There are several reasons why Smithfield decided to build a vertically integrated production model. First, the model provided the company with a competitive advantage over non-integrated businesses. Vertical integration is common in the pork industry, as it allows the limited number of major pork producers to control and dominate the market. Second, Smithfield’s focus on pork production rather than beef or chicken facilitated the management of their plants and encouraged growth and product diversification within the pork production sector. Finally, the benefits of vertical integration strategy (e.g., reduced transportation costs, improved supply chain coordination) assisted in Smithfield’s geographic expansion to the foreign markets, including China. Therefore, the vertical integration production model allowed Smithfield to supply quality products to domestic and international markets and led to the successful acquisition by Shuanghui.