VERTICAL INTEGRATION STRATEGY

BUILDING AND ERODING OF COMPETITIVE ADVANTAGES Build-up Benefit Erosion Period Period Period Size of Comp Advtg Time

VERTICAL INTEGRATION REFERS TO EXTENSION OF A FIRM’S SCOPE WITHIN THE SAME INDUSTRY BACKWARD INTEGRATION: INTEGRATION TOWARDS THE SOURCE OF SUPPLY FORWARD INTEGRATION: INTEGRATION TOWARDS THE END USERS OF THE PRODUCT

FULL INTEGRATION: INTEGRATION AT ALL STAGES OF INDUSTRY’S VALUE CHAIN PARTIAL INTEGRATION: BUILDING POSITION ONLY IN SOME STAGES VERTICAL INTEGRATION IS POSSIBLE THROUGH ACQUISITION OR EXTENDING ITS OWN OPERATIONS AT OTHER STAGES

HORIZONTAL INTEGRATION A strategy to seek ownership of or increased control over a firm’s competitors. Extend business over a range of product lines e.g. Household appliances: cooking range, refrigerators, washing machines, e.g. television, music system, radio, etc. Mergers, acquisitions, takeovers

WHY VERTICAL INTEGRATION? TO STREGTHEN FIRM’S COMPETITIVE POSITION TO GAIN COST ADVANTAGES TO GIVE BETTER, SMOOTH SERVICES TO CUSTOMERS

BACKWARD INTEGRATION WHY? TO CAPTURE ECONOMIES OF SCALE WHEN SUPPLIERS HAVE LARGE PROFIT MARGIN THE INPUT IS A MAJOR ITEM IN THE PRODUCTION THE TECHNOLOGY NEEDED CAN BE MASTERED CORE COMPETENCE IS BUILT TO AVOID DEPENDENCY ON SUPPLIERS TO LESSEN FIRM’S VULNERABILITY TO POWERFUL SUPPLIERS

FORWARD INTEGRATION WHY? TO CONTROL THE FORWARD CHANNEL INDEPENDENT SALES AGENTS, WHOLESALERS, RETAILERS: A. MAY HANDLE DIFFERENT BRANDS SIMULTANEOUSLY, B. MAY PILE UP COSTLY INVENTORIES, C. MAY CAUSE TO LOSS OF SALES AND CONSUMERS CONFIDENCE

FORWARD INTEGRATION HELPS WHEN THERE IS COST SAVING BETTER CUSTOMER SERVICES OR GOODS ARE PROVIDED IMPROVES CORE COMPETENCE MIDDLEMEN / DISTRIBUTION CHANNEL ENTAIL HUGE COSTS

PROBLEMS WITH INTEGRATION INCREASE IN FIRM’S INVESTMENT INCREASE IN BUSINESS RISK VESTED INTEREST IN PROTECTING PRESENT INVESTMENT IN TECHNOLOGY AND PRODUCTION FACILITIES LESS FLEXIBILITY IN ACCOMODATING CHANGES IMBALANCE IN CAPACITY UTILIZATION IN DIFFERENT STAGES DIFFERENT SETS OF EXPERTISE AND SKILLS MAY BE REQUIRED IT MAY BE MORE EXPENSIVE

UNBUNDLING AND OUTSOURCING STRATEGIES VERTICAL DEINTEGRATION: WITHDRAWING FROM CERTAIN STAGE / ACTIVITY AND RELYING ON OUTSIDE SUPPLIERS / VENDORS

WHY? IT REDUCES COSTS THE ACTIVITY IS NOT CRUCIAL TO THE FIRM AND DOES NOT MITIGATE CORE COMPETENCE IT REDUCES FIRM’S RISK EXPOSURE TO CHANGING TECHNOLOGY IT IMPROVES ORGANIZATIONAL FLEXIBILITY IT ALLOWS FIRM TO CONCENTRATE ON CORE COMPETENCE