Integration strategy

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Integration Strategy

Types of Strategies

Type of Strategies

Integration Strategy also called Management Control Strategy .

Integration strategies allow a firm to gain control over distributors, suppliers, and/or competitors.

Types of Integration Strategy

Integration Strategies

IntegrationStrategy

VerticalIntegration

Forward

Backward

Horizontal Integration

“Vertical integration” is a strategy used by a company to gain control over its suppliers or distributors in order to increase the firm’s power in the marketplace, reduce transaction costs and secure supplies or distribution channels.

“Forward integration” is a strategy where a firm gains ownership or increased control over its previous customers (distributors or retailers).

“Backward integration” is a strategy where a firm gains ownership or increased control over its previous suppliers. (raw material provider )

Definition

Vertical integration (VI) is a strategy that many companies use to gain control over their industry’s value chain.

This strategy is one of the major considerations when developing corporate level strategy.

The important question in corporate strategy is, whether the company should participate in one activity (one industry) or many activities (many industries) along the industry value chain.

For example, the company has to decide if it only manufactures its products or would engage in retailing and after-sales services as well.

What is vertical integration?

Costs: An organization should vertically integrate when costs of making the product inside the company are lower than the costs of buying that product in the market.

Scope of the firm: A firm should consider whether moving into new industries would not dilute its current competencies. New activities in a company are also harder to manage and control. The answers to previous questions determine if a company will pursue none, partial or full VI.

Two issues have to be considered before integration

Example a general industry value chain partial or full VI

Types of Vertical Integration

If the manufacturing company engages in sales or after-sales industries it pursues forward integration strategy.

This strategy is implemented when the company wants to achieve higher economies of scale and larger market share.

Forward integration strategy became very popular with increasing internet appearance.

Many manufacturing companies have built their online stores and started selling their products directly to consumers, bypassing retailers.

Forward integration

Few quality distributors are available in the industry.

Distributors or retailers have high profit margins.

Distributors are very expensive, unreliable or unable to meet firm’s distribution needs.

The industry is expected to grow significantly.The company has enough resources and

capabilities to manage the new business. There are benefits of stable production and

distribution.

Forward integration strategy is effective when:

When the same manufacturing company starts making intermediate goods for itself or takes over its previous suppliers, it pursues backward integration strategy.

Firms implement backward integration strategy in order to secure stable input of resources and become more efficient.

Backward integration

Firm’s current suppliers are unreliable, expensive or cannot supply the required inputs.

There are only few small suppliers but many competitors in the industry.

The industry is expanding rapidly.The prices of inputs are unstable.Suppliers earn high profit margins.A company has necessary resources and

capabilities to manage the new business.

Balanced integration strategy is simply a combination of forward and backward integrations.

Backward integration strategy is most beneficial when:

Vertical Integration ExamplesSmartphone's Industry Automotive Industry

Vertical Integration ExamplesOil Industry Media Industry

Lower costs due to eliminated market transaction costs

Improved quality of suppliesCritical resources can be acquired through VIImproved coordination in supply chainGreater market shareSecured distribution channelsFacilitates investment in specialized assets

(site, physical-assets and human-assets)New competencies

Advantages

Higher costs if the company is incapable to manage new activities efficiently

The ownership of supply and distribution channels may lead to lower quality products and reduced efficiency because of the lack of competition

Increased bureaucracy and higher investments leads to reduced flexibility

Higher potential for legal repercussion due to size (An organization may become a monopoly)

New competencies may clash with old ones and lead to competitive disadvantage

Disadvantages

Vertical Integration AlternativesThis strategy may not always be the best choice for an organization due to a lack of sufficient resources that are needed to venture into a new industry. Sometimes the alternatives to VI offer more benefits. The available choices differ in the amount of investments required and the integration level.

Definition“It is the process of acquiring or merging

with competitors, leading to industry consolidation.”

“Horizontal integration is a strategy where a company acquires, mergers or takes over another company in the same industry value chain.”

For example, Disney merging with Pixar (movie production),

Horizontal Integration

Organization competes in a growing industry.Competitors lack of some capabilities,

competencies, skills or resources that the company already possesses.

HI would lead to a monopoly that is allowed by a government.

Economies of scale would have significant effect.

The organization has sufficient resources to manage M&A.

HI may be an effective strategy when:

HI in manufacturing industry:

Acquiring company + Acquired companyPepsiCo + Quaker Oats (in 2001)

Glaxo Wellcome+SmithKline Beecham=GlaxoSmithKline (in 2000)

HP + Compaq (in 2002)

Oracle + PeopleSoft (in 2005)

United Airlines + Continental (in 2010)

Microsoft + Yahoo! (in 2013, 2014)

Apple + AuthenTec (in 2012)

Horizontal integration examples

Coke’s StrategyThe Coca Cola Company used forward vertical

integration to move a step closer to their consumers.

Forward vertical integration refers to a management style of involves a form of vertical integration whereby activities are expanded to include control of the direct distribution of its products”.

https://amebeobariollor.wordpress.com/2012/05/01/coca-colas-strategy-for-intergration/

Real Time Examples of Compnaies

DirectTVThe 2003 purchase of DirectTV by News

Corporation is an example of a forward integration through acquisition.

DirectTV is a satellite TV company, and its purchase enabled News Corporation to use it as a medium to distribute more of its news, movies and television shows by managing the process itself.

http://smallbusiness.chron.com/example-companys-forward-integration-37601.html


Costco WholesaleCostco Wholesale is one of the largest wholesale-to-

consumer business operations. A key quality of wholesalers that forward integrate is

that they typically sell to both consumers and business buyers.

Wholesalers normally offer bulk quantities or sizes that other small businesses buy and use.

A restaurant might purchase a case of ketchup, for instance.

Consumers may also see a benefit in buying large, economical quantities of products the routinely use, such as pickles, diapers or frozen foods.

http://yourbusiness.azcentral.com/example-companys-forward-integration-28860.html


Apple:Vertical integration dictates that one company controls

the end product as well as its component parts. In technology, Apple for 35 years has championed a

vertical model, which features an integrated hardware and software approach.

For instance, the iPhone and iPad have hardware and software designed by Apple, which also designed its own processors for the devices.

This integration has allowed Apple to set the pace for mobile computing. “Despite the benefits of specialization, it can make sense to have everything under one roof,”

http://knowledge.wharton.upenn.edu/article/vertical-integration-works-for-apple-but-it-wont-for-everyone/


Microsoft is opening its own retail stores, a forward integration strategy similar to rival Apple Inc., which currently has more than 200 stores around the world.

Microsoft wants to learn firsthand about what consumers want and how they buy.

CompUSA Inc. recently closed most of its retail stores, and neither Hewlett-Packard nor IBM have retail stores.

Some Microsoft shareholders are concerned that the company’s plans to open stores will irk existing retail partners such as Best Buy.

Automobile dealers have for many years pursued forward integration, perhaps too much.

Ford has almost 4,000 dealers compared to Toyota, which has fewer than 2,000 U.S. dealers. That means the average Toyota dealer sold, for example, 1,628 vehicles in 2007 compared to 236 vehicles for Ford dealers. GM, Ford, and Chrysler are all reducing their number of dealers dramatically.


A simple example of backward vertical integration strategy is an ice cream company that buys a dairy farm. The company requires milk to make ice cream and either can buy milk from a dairy farm or other milk supplier or could own the dairy farm itself. This ensures that it will have a steady supply of milk at its disposal and that it will pay a reasonable price. This can protect the ice cream maker in the event that there are several other buyers vying for the same milk supply.

Hypothetical Example

Amazon.comBooksellers set the price at which Amazon.com can

buy a book from them. This in turn limits the amount that Amazon.com can charge a customer for a book and still make a profit. If Amazon.com publishes the book itself, it can acquire its books cheaper, as its publishing arm does not need to produce a profit as an independent publisher would. Amazon can choose whether to sell the books it publishes to other bookstores or sell its books only through Amazon.com. In this way, it can control competition for its books and the price it can charge for them.

http://smallbusiness.chron.com/examples-backward-vertical-integration-strategies-14703.html


StarbucksStarbucks chose to buy a coffee farm in China, an

area that showed tremendous growth in the number of coffee drinkers. At the same time, there was increased competition among companies selling coffee, such as McDonald's and other chains such as Costa Coffee. Adding so many new coffee drinkers to the market creates competition for high-quality beans, with every coffee shop needing to buy them. By backward vertically integrating by buying a coffee farm, Starbucks ensures that it will have a bean supply and that it will receive it at a reasonable price.

http://smallbusiness.chron.com/examples-backward-vertical-integration-strategies-14703.html


Integration strategy

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