A successful business model results from business level strategies. (that create a competitive advantage over its rivals). To create a successful Business Model, managers must optimize competitive positioning. To craft a successful b-model, a company must first define its business, through defining
- Customer needs I. E. What is to be satisfied ?
- Customer groups I. E. Who is to be satisfied ?
- Distinctive competencies I. E. How customers are to be satisfied ?
These decisions determine which strategies are formulated & implemented to put a business model into action. Page Vertical integration is a strategy that allows a firm 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. Vertical Integration Strategies Forward integration Backward integration Horizontal integration Vertical integration (VI) is simply a type of strategy that is implemented by a firm. Although Just one of many possible strategies, it is a major strategic concern when formulating 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. Two issues have to be considered before 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 fully.
The example below illustrates a general industry value chain and none, partial or full f a corporate operating in that industry. Difference between vertical and horizontal integration It is different from horizontal integration, where a corporate usually acquires or mergers with a competitor in a same industry.
An example of horizontal integration would be a company competing in raw materials industry and buying another company in the same industry rather than trying to expand to intermediate goods industry. Horizontal integration examples: Kraft Foods taking over Academy, HP acquiring Compact or Leno buying personal computer division from MM. 71 page Types of vertical integration Forward integration is a strategy where a firm gains ownership or increased control over its previous customers (distributors or retailers).
If the manufacturing company 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 strategy is effective when: 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. There are benefits of stable production and distribution. The company has enough resources and capabilities to manage the new business.
Backward integration Backward integration is a strategy where a firm gains ownership or increased control over its previous suppliers. 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 strategy is most beneficial when: 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.
Lower costs due to eliminated market transaction costs Improved quality of supplies. Critical resources can be acquired through Vertical Integration Improved coordination in supply chain Greater market share Secured distribution channels Facilitates investment in specialized assets (site, physical-assets and humaneness) New competencies Disadvantages of Vertical Integration: 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 higher investments leads to reduced flexibility Higher potential for legal repercussion due to size (An organization may become a monopoly) New competencies may clash tit old ones and lead to competitive disadvantage 101 page Alternatives to Vertical Integration: Vertical Integration 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. For example, short- term contracts require little integration and much less investments than Joint ventures. Horizontal Integration “It is the process of acquiring or merging with competitors, leading to industry installation. ” Horizontal integration is a strategy where a company acquires, mergers or takes over another company in the same industry value chain. “
It is a type of integration strategies pursued by a company in order to strengthen its position in the industry. A corporate that implements this type of strategy usually mergers or acquires another company that is in the same production stage. For example, Disney merging with Paxar (movie production), Exxon with Mobile (oil production, refining and distribution) or the infamous Daimler Benz and Chrysler merger (car developing, manufacturing and retailing). The purpose of horizontal integration (HI) is to grow the company in size, increase product differentiation, achieve economies of scale, reduce competition or access new markets.
When many firms pursue this strategy in the same industry, it leads to industry consolidation (oligopoly or even monopoly). HI can occur in a form of mergers, acquisitions or hostile takeovers. Merger is the Joining of two similar sizes, independent companies to make one Joint entity. Acquisition is the purchase of another company. Hostile takeover is the acquisition of the company, which does not want to be acquired.
Horizontal Integration may be an effective strategy when: 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.