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OM in the News: Vertical Integration Benefits Luke’s Lobster

August 30, 2016
The Luke’s Lobster restaurant in Tenants Harbor, Me. Fifty percent of its profits go to the fishermen’s co-op that operates at the adjacent wharf.

The Luke’s Lobster restaurant in Tenants Harbor, Me.

“It was a steamy summer day in New York in 2009 when Luke Holden, an investment banker, had a craving for a lobster roll,” writes The New York Times (Aug. 25, 2016). Not just any lobster roll, though. He longed for the “fresh off the docks” taste he enjoyed growing up in Maine. Dissatisfied and disappointed in his search, Holden decided to open an authentic Maine lobster shack in Manhattan. To replicate that fresh taste that he remembered, he would need to oversee, track and, where possible, own every step in the process.

Today, he owns 19 Luke’s Lobster restaurants, two food trucks and a lobster tail cart in the U.S., and five shacks in Japan. He holds an ownership stake in a co-op of Maine fishermen, which allows him to track where and how the lobsters are caught, and control the quality, freshness and pricing. He also owns the processing plant that packages and prepares the lobsters for his restaurants.

 This might seem obsessive. But in operations management (see Ch.11 in our text), we call it a vertical integration strategy. Oil companies have long practiced vertical integration to track and control the flow of petroleum from the oil field to the gas pump. Apple controls its flow from chip makers all the way to retail stores.

“Owning one or more levels of the supply chain is a highly effective way to maintain quality and obtain an advantage against competitors,” says an industry expert.

Classroom discussion questions:

  1. Provide other examples of companies that are vertically integrated.
  2. What are the potential disadvantages of vertical integration?
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