1. VERTICAL INTEGRATION STRATEGY

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

3. 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

4. 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

5. 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

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

7. 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

8. 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

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

10. 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

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

12. 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