Integration Strategies:
Forward integration, backward integration, and horizontal
integration are sometimes collectively
referred to as vertical integration strategies. Vertical integration
strategies allow a firm to gain control over
distributors, suppliers, and/or competitors.
Forward integration strategy refers to the transactions
between the customers and firm. Similarly, the function for the
particular supply which the firm is being
intended to involve itself will be called backward integration. When
the firm looks that other firm
which may be taken over within the area of its own activity is called
horizontal integration.
Benefits of vertical integration strategy:
Allow a firm to gain control over:
. Distributors (forward integration)
. Suppliers (backward integration)
. Competitors (horizontal integration)
Forward integration: Gaining ownership or increased control over
distributors or retailers
Forward integration involves gaining ownership or increased control over
distributors or retailers.
You can gain ownership or control over the distributors, suppliers
and
Competitors using forward integration.
Guidelines for the use of integration strategies:
Six guidelines when forward integration may be an especially
effective strategy are:
. Present distributors are expensive, unreliable, or incapable of
meeting firm’s needs
. Availability of quality distributors is limited
. When firm competes in an industry that is expected to grow
markedly
. Organization has both capital and human resources needed to
manage new business of distribution
. Advantages of stable production are high
. Present distributors have high profit margins
When your present distributors are expensive and you think that
without affecting the quality of the
goods you have to carry own the operations, forward integration is
advisable.
Similarly, if distributors are unreliable, they can not deliver with a
sustained degree of timeliness or they
are not in a proper way to meet the needs of the firm, forward
integration is advisable.
Availability of quality distributors is limited or it is difficult to get the
quality of goods, then this need
for a quality distributor, forward integration is best alternative.
Suppose you have two industries, computers and mobile telephone
which are progressing
tremendously, it is advisable to think of forward integration due to
the changing environment of the
business.
Organization has both capital and human resources needed to
manage new business of distribution. A
firm has all the basic elements to run the business safely in that case
forward integration is best
alternate.
For stable production, stable supply is necessary. If you think that
present distributors are charging high
mark up, you may do that operation your self in order to avoid the
mark up charges. It is advisable that
firm itself involve in the operations. By gaining control, stability will
be more and profitability will be
enhanced.
• When an organization's present distributors are especially
expensive, or unreliable, or incapable of
meeting the firm's distribution needs
• When the availability of quality distributors is so limited as to offer
a competitive advantage to
those firms that integrate forward
• When an organization competes in an industry that is growing and
is expected to continue to grow
markedly; this is a factor because forward integration reduces an
organization's ability to diversify if
its basic industry falters
• When an organization has both the capital and human resources
needed to manage the new
business of distributing its own products
• When the advantages of stable production are particularly high;
this is a consideration because an
organization can increase the predictability of the demand for its
output through forward
integration
• When present distributors or retailers have high profit margins; this
situation suggests that a
company profitably could distribute its own products and price them
more competitively by
integrating forward
Backward Integration –
Seeking ownership or increased control of a firm’s suppliers
Both manufacturers and retailers purchase needed materials from
suppliers. Backward integration is a
strategy of seeking ownership or increased control of a firm's
suppliers. This strategy can be especially
appropriate when a firm's current suppliers are unreliable, too
costly, or cannot meet the firm's needs.
Guidelines for Backward Integration:
Six guidelines when backward integration may be an especially
effective strategy are:
. When present suppliers are expensive, unreliable, or incapable of
meeting needs
. Number of suppliers is small and number of competitors large
. High growth in industry sector
. Firm has both capital and human resources to manage new
business
. Advantages of stable prices are important
. Present supplies have high profit margins
• When an organization's present suppliers are especially expensive,
or unreliable, or incapable of
meeting the firm's needs for parts, components, assemblies, or raw
materials
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• When the number of suppliers is small and the number of
competitors is large
• When an organization competes in an industry that is growing
rapidly; this is a factor because
integrative-type strategies (forward, backward, and horizontal)
reduce an organization's ability to
diversify in a declining industry
• When an organization has both capital and human resources to
manage the new business of
supplying its own raw materials
• When the advantages of stable prices are particularly important;
this is a factor because an
organization can stabilize the cost of its raw materials and the
associated price of its product
through backward integration
• When present supplies have high profit margins, which suggests
that the business of supplying
products or services in the given industry is a worthwhile venture
• When an organization needs to acquire a needed resource quickly
Horizontal Integration:
Seeking ownership or increased control over competitors
Horizontal integration refers to a strategy of seeking ownership of or
increased control over a firm's
competitors. One of the most significant trends in strategic
management today is the increased use of
horizontal integration as a growth strategy. Mergers, acquisitions,
and takeovers among competitors
allow for increased economies of scale and enhanced transfer of
resources and competencies.
Increased control over competitors means that you have to look for
new opportunities either by the
purchase of the new firm or hostile take over the other firm. One
organization gains control of other
which functioning within the same industry.
It should be done that every firm wants to increase its area of
influence, market share and business.
Guidelines for Horizontal Integration:
Four guidelines when horizontal integration may be an especially
effective strategy are:
. Firm can gain monopolistic characteristics without being
challenged by federal government
. Competes in growing industry
. Increased economies of scale provide major competitive
advantages
. Faltering due to lack of managerial expertise or need for particular
resources
When an organization can gain monopolistic characteristics in a
particular area or region without being
challenged by the federal government for "tending substantially" to
reduce competition
When an organization competes in a growing industry
When increased economies of scale provide major competitive
advantages
When an organization has both the capital and human talent needed
to successfully manage an
expanded organization
When competitors are faltering due to a lack of managerial expertise
or a need for particular resources
that an organization possesses; note that horizontal integration
would not be appropriate if competitors
are doing poorly because overall industry sales are declining
