...Impact of Vertical Integration Table of Contents What is Vertical Integration?3 De Beers Summary3 Internal strengths of vertical integration5 External strengths of vertical integration6 Disadvantages of vertical integration7 Quad/Graphics and vertical integration7 Four types of Vertical Integration 7 Ownership and Breadth of De Beers 9 Conclusion 10 References11 What is Vertical Integration? Vertical integration is a powerful corporate strategy that when implemented under the right circumstances can work towards the organizations advantage. Vertical integration describes a firm's control over several or all of the production and or distribution steps involved in the creation of its product or service. This integration takes the assets that was owned by two organizations and combines it into a single business; this creates either a joint ownership, or the sale of one firm’s assets to another business. This strategy is more advantageous then contracting with an outside company since usually it creates lower operating costs and more control over quality of its products or services. Forward and backward integration in an organizations’ value chain is an attempt to strengthen a company’s business model. Although there are different forms of vertical integration, its main approach is either to expand operations backward into an industry that produces inputs for the company, or forward into an industry that distributes the company’s products. According to Harrigan...
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...contracting parties. A term used to describe the use of the Internet to replace physical components of a company with information. A business engaged in virtual integration owns only their brand and their clients. This eliminates the need to physically produce, ship or handle any products as they are now outsourced. Read more: http://www.businessdictionary.com/definition/virtual-integration.html#ixzz3EphPUex0 ://www.businessdictionary.com/definition/integration.html#ixzz3EpfP12T2 DEFINITION of 'Vertical Integration' When a company expands its business into areas that are at different points on the same production path, such as when a manufacturer owns its supplier and/or distributor. Vertical integration can help companies reduce costs and improve efficiency by decreasing transportation expenses and reducing turnaround time, among other advantages. However, sometimes it is more effective for a company to rely on the expertise and economies of scale of other vendors rather than be vertically integrated. INVESTOPEDIA EXPLAINS 'Vertical Integration' Backward and forward integration are types of vertical integration. A company that expands backward on the production path has backward integration, while a company that expands forward on the production path is forward integrated. Examples of vertical integration include: - A mortgage company that both originates and services mortgages, meaning that it both lends money to homebuyers and collects their monthly payments. ...
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...STUDIES The Effects of Vertical Integration on Oil Company Performance Fernando Barrera-Rey Oxford Institute for Energy Studies WPM 21 October 1995 The contents of this paper are the author's sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members. Copyright 0 1995 Oxford Institute for Energy Studies All rights reserved. No palt of this publication may be reproduced, stored in a retrieval system, or transmitted in any fomi or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior pemiission of the Oxford Institute for Energy Studies. This publication is sold subject to the condition that it shall not, by way of trade or otherwise. be lent, resold, hired out, or otherwise circulated without the publisher's prior consent in any fonii of binding or cover other than that in which it is published and without D similar condition including this condition being imposed on the subsequent purchaser. ISBN 0 948061 90 1 ABSTRACT When asked to rank industries by their degree of vertical integration, most people would agree that the oil industry should come top of the list. Underlying this belief is the fact that integration and size tend to be closely associated. As the oil industry is so large and oil companies so visible and perceived as so profitable, the common belief is a correlation between vertical integration, size and performance. If...
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...lower costs and maximize profits. However, mangers must analyze the benefits and costs of each decision because of potential conflicts that can arise from bureaucratic inefficiencies. Discussion Hill, Jones, & Chilling (2015) state that “[t]he overriding goal of managers is to maximize the value of the company for its shareholders” (p. 287). Further, the text addresses how Apple strategically chose outsourcing and vertical integration as strategies, which influenced the firm’s profitability. Specifically, the authors note that corporate-level strategy involves choices, which managers must make in (1) deciding on which industries and business sectors the company should compete; (2) selecting value creation activities within those sectors; and (3) deciding how it should enter and exit specific business sectors in order to maximize profitability (Hill, Jones, & Schilling, 2015). Hill, Jones, & Schilling (2015) reference that horizontal integration “is the process of acquiring or merging with industry competitors to achieve the competitive advantages that arise from a large size and scope of operations” (p. 290). Further, advantages of horizontal integration include a lowered cost structure, increased product differentiation, a leveraged competitive advantage, and an increased bargaining power (Hill, Jones, & Schilling, 2015). However, the primary disadvantage with horizontal integration is that the strategy is challenging for managers for a variety of...
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...practice natural environment Niman Ranch contracts with family farms to raise their animals in a natural environment without the use of drugs or hormones. Niman Ranch is so committed to the family farm philosophy that it sees itself as the processing and marketing operation for about 100 family farms. This was also interested because of the different sites in which animals were processed at, also the different packaging and how it applies their farm to supply management. c. What is the difference between vertical integration and vertical coordination? The difference between vertical integration and vertical coordination, is vertical integration is full ownership of the various stages of production, processing, and distribution throughout the supply chain. Vertical integration is a subset of vertical coordination. There are also three general types of vertical integration; quasi-vertical integration, tapered vertical integration, full vertical integration. Whereas, vertical...
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... Horizontal integration b. Vertical integration c. Conglomerate integration d. None of the above 2. The source (home) location of most of the world's leading multinational enterprises is: a. North America and Europe b. North America and Asia c. Europe and South America d. Europe and Asia 3. Which type of multinational diversification occurs when the parent firm establishes foreign subsidiaries to produce intermediate goods going into the production of finished goods? a. Forward vertical integration b. Backward vertical integration c. Forward horizontal integration d. Backward horizontal integration 4. Suppose that an American automobile manufacturer establishes foreign subsidiaries to market the automobiles. This practice is referred to as: a. Forward vertical integration b. Forward conglomerate integration c. Backward vertical integration d. Backward conglomerate integration 5. Suppose that a steel manufacturer headquartered in Japan sets up a subsidiary in Canada to produce steel. This practice is referred to as: a. Conglomerate integration b. Forward vertical integration c. Backward vertical integration d. Horizontal integration 6. During the 1970s, American oil companies acquired nonenergy companies (e.g., copper, auto components) in response to anticipated decreases in investment opportunities in oil. This type of diversification is referred to as: a. Horizontal integration b. Conglomerate integration c. Forward vertical integration d. Backward...
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...firms in a horizontally integrated (or focused) sector against those in more diversified businesses which are vertically integrated or conglomerates. In this report, I will be analysing and comparing how these integrations are being effectively deployed by various organisations in order to have the edge above their competitors in the sector. The second part of this report will focus on the clear definition of the types of business integration discussed as well as giving examples of each type. With the aim of using numerous examples and case studies, to show how these organisations are using the integration to gain more control and less competition in their sector. Horizontal Integration Horizontal Integration, according to Investopedia, this is defined as “When a company expands its business into different products that are similar to current lines”. However there are so many definitions to define horizontal integration but one thing all the definitions have in common is the coming together of two or more companies with the aim of becoming the dominant force in the sector and also generating more profit with less input compared to when these companies operate separately, but this is be done under single ownership and control. Another definition of horizontal integration is “the merger of companies at the same stage of production in the same or different sectors”. (Business Dictionary). If the end products of the merging companies are similar in a way, this can be referred...
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...3. Which type of vertical marketing system does Zara employ? List all the benefits that Zara receives by having adopted this system. Zara employs a Corporate Vertical Marketing System. Zara has managed to build a system that is controlled from a single place and that it allows it for quick response, decision and problem solving. Because Zara’s parent company Inditex owns most of the resources needed for the process of clothing design, production and distribution it is able to “control most every aspect of the supply chain, from design and production to its own worldwide distribution network” (Armstrong & Kotler). Vertical Marketing System Introduction In an organization, effective marketing strategies play an important role in boosting the performance of the business. In the integration of the corporate leaders in pursuit of their financial objectives, the creation of marketing system has been established. The creation of vertical marketing system is introduced and defined as a distributing channel in which the manufacturer, wholesaler, and retailer act as a single system. An organization that can control the product and services until it reached to the end consumers is the plain example of vertical marketing system. Apparently only few of the businesses around the world successfully managed this type of system. It may define as a difficult approach to maintain the sales and effectiveness but it serves as the strongest point of the organization to boost the various...
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...FROM WHOLESALE TO RETAIL: IMPROVING THE FORWARD VERTICAL INTEGRATION STRATEGY AT FRESHMARK (PTY.) LTD. A dissertation by BARTHOLOMEW CHARLES BENECKE Submitted in partial fulfillment of the requirements for the degree MASTER’S DEGREE IN BUSINESS ADMINISTRATION (MBA) in the BUSINESS SCHOOL FACULTY OF MANAGEMENT SCIENCES TSHWANE UNIVERSITY OF TECHNOLOGY Supervisor: Prof. JA Watkins Co- Supervisor: V Naidoo May 2007 DECLARATION OF COPYRIGHT “I hereby declare that this dissertation submitted for the degree Master’s in Business Administration (MBA) at the Tshwane University of Technology, is my own original unaided work and has not previously been submitted to any other institution or higher education. I further declare that all sources cited are cited or quoted are indicated or acknowledged by means of a comprehensive list of references” BARTHOLOMEW CHARLES BENECKE Copyright© Tshwane University of Technology 2006 ii DEDICATION “This study is dedicated to my God, and King, to whom I give praise for all the gifts and strength He has granted me, and to my love Jasmyn, for her steadfast support through this time. I will love you both forever.” iii ACKNOWLEDGEMENTS I hereby wish to acknowledge the contribution of the following persons to the completion of this dissertation: ► To my parents for their love and support through all my years of study. Thank you for believing in me, even when I did not believe in myself. ► To Professor Watkins, for all his...
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...Strategy Part I. Chapters 13 & 15 (pages 392-404, 450-459, 461-464) 1. Benefits and Costs of Concentration A. Benefits (Advantages): 1) Firms can master one industry environment (top managers acquire an in-depth knowledge of the industry) 2) All resources are put back into the business (creates sustainable competitive advantage) 3) There are typically lower overhead costs and fewer “layers” in the organization which leads to reduced “bureaucratic costs” B. Costs (Disadvantages): 1) There is a total dependency on the industry (the firm has all its eggs in one basket) 2) Firms tend to develop a “myopic” view and management doesn’t see change coming and therefore is unable to change when times get tough 3) Top managers are not challenged and may become bored and stagnant 4) The firm misses opportunities to leverage resources and capabilities in an area outside of the industry that may be more profitable 2. Vertical Integration A. What is vertical integration? Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers. Typically a firm does not vertically integrate unless by doing so it can either cut costs or create a differentiation advantage. B. What are the pros (benefits) and cons (drawbacks) of vertical integration? Benefits of Vertical Integration: 1) Reduce transportation costs if common ownership results in closer...
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...Taking Care 11/7/05 3:44 PM Page 1 Opportunities for Action in Consumer Markets Taking Care of Brands Through Vertical Integration Taking Care 11/7/05 3:44 PM Page 3 Taking Care of Brands Through Vertical Integration Esprit, H&M, Zara, and other vertically integrated brands have captured significant market share over the past few years, growing more rapidly than traditional manufacturers and retailers. By controlling the whole value chain, from manufacturing to retail—and thereby blending product and retail identity—vertical brands can offer attractive economics. With traditional retail channels on the decline, many manufacturers—especially those in textiles, furniture, leather goods, sporting goods, and luxury goods—are choosing vertical integration as a way to better manage their brands. There are, however, many approaches to vertical integration. To get a closer look at the risks, benefits, and best practices of the various approaches, The Boston Consulting Group conducted a detailed survey among a number of leading brands. This article presents highlights from that study. Why Vertical Integration Now? In a traditional business system, the producer controls product design and development, manufacturing, selling and distribution to retailers, product service, and advertising, whereas the retailer is responsible for store concept and design, store management, product assortment, visual merchandising, and selling to consumers...
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...HW 2 Answers: 3. a. Contract. b. Vertical Integration. c. Spot exchange (or possibly contract if a specific investment in many motors is required). d. Spot exchange. 4. Engine manufacturing involves specific investments and a complex contracting environment. By vertically integrating, the potential for opportunism is reduced. Mirrors are relatively uniform products that can be purchased by spot exchange or contract. 5. a. Human capital. b. Physical asset specificity; note that the assembly line was designed especially for a particular firm’s product. c. Site specificity. 8. a. Reduce the benefits of vertical integration. b. Reduce the benefits of vertical integration and lead firms to use contracts or spot exchange to procure inputs. c. Lead to contracts that are more detailed or vertical integration. d. Make spot exchange an unattractive method of procurement due to opportunism and possibly underinvestment. e. Make contracts a less attractive form of input acquisition. f. Lead to longer contracts, or in extreme instances, vertical integration. 9. a. When MC(L) = 30 + 4L, the optimal contract lengths sets this equal to the marginal benefit of $100, yielding L = 17.5. b. When MC(L) = 40 + 5L , the optimal contract length sets this equal to the marginal benefit of $100, yielding L = 12. c. When the marginal cost curve increases, the optimal contract length decreases. When the marginal cost curve...
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...There are many choices in maximizing the power of strategy. These choices complement a spirited approach and make the most of the power of strategy. These choices include: 1. Offensive and Defensive Competitive Actions 2. Competitive Dynamics and the Timing of Strategic Moves 3. Scope of Operations along the Industry’s Value Chain The above three choices will be explored throughout this paper. There are multiple measures to enhance the decision for maximizing the power of strategy. These include: • Whether and when to go on the offensive. • Whether and when to employ defensive strategies. • Whether to merge with or acquire another firm. • Which value chain activities, if any, should be outsourced. There are many other multiple measures to enhance the decision for maximizing the power of strategy. A company may decide to integrate backward or forward within the company or industry’s activity chain, or may decide to enter into agreements or partnerships within the industry. OFFENSIVE AND DEFENSIVE COMPETITIVE ACTIONS First a company must decide on where to go on the offense or defense. Some offense actions may already be employed with the general strategy of competing with other businesses. These include such things as focusing on building competitive edge, appropriating assets where competitors are found to be weak and protect their investments, or using a surprise tactic. Occasionally the firm’s best option is to be the first to use the strategy, and commence...
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...why do you think that executives keep making these horizontal integration moves? Although many mergers and acquisitions fail, I feel that executives keep making a horizontal integration decision because it makes the most sense to integrate business activities. If firms are involved with the same stage of production, and share the same resources it could seem more efficient, less costly, and convenient for separate companies to merge. 2. Please identify a struggling company that interests you and share why you are interested in this particular company. Then please identify how this company could benefit from a) market penetration, b) market development, and c) product development. I would like to discuss Sears in this section. Sears interests me because they once were a leader in department stores with one of the highest profits in Canada. Unfortunately Sears has been suffering due low profits and sales. a) Sears could profit from market penetration by introduction promoting new or existing products through strategies such as bundling, advertising, lowering prices and volume discounts. Sears does not do much or any advertising so, consumers do not shop at Sears simply because they do not know there are sales, or hear any promotion on products. Competitors such as The Bay, and Macys do great advertising on their sales and promotions. b) Sears has wide ranges of products but they could benefit more from market development. Although they have a wide selection...
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...better at producing one product than the other 4-Product life cycle theory A product life cycle refers to the time period between the launch of a product into the market till it is finally withdrawn from it. In a nut shell, product life cycle or PLC is an odyssey from new and innovative to old and outdated! This cycle is split into four different stages which encompass the product's journey from its entry to exit from the market. This theory suggest that products pass through a four-stage cycle: 1- Introduction 2- Growth 3- Maturity 4- Decline 5-New trade theory Free trade implies specialization and requires that nations neither artificially limit imports nor artificially promote exports. It suggested that it might benefit countries with an advantage in producing certain goods to initially protect the trade of such goods. By doing so, the economic advantage for the producing company might be more greatly realized, especially in the future. 6-Porter’s determinants of national competitive advantage Michael Porter identified four determinants of national competitive advantage (Porter 1992) 1- Factor Conditions The situation in a country regarding production factors, like skilled labor, infrastructure, etc., which are relevant for competition in particular industries. 2- Demand Conditions A national’s competitive advantage is increased if there...
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