final distribution ppt
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VERTICAL INTEGRATIONVERTICAL INTEGRATION
It is the process in whichseveral steps in the
production and/or distributionof a product or service arecontrolled by a single
company or entity, in order toincrease the company's orentity's power in the
marketplace.
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p
CHANNELS OF VERTICALCHANNELS OF VERTICALINTEGRATIONINTEGRATION
1)Backward vertical integration
2)
3)
4)Forward vertical integration
5)
6)
3) Balanced vertical integration
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BACKWARD VERTICALBACKWARD VERTICALINTEGRATIONINTEGRATION
The company sets up subsidiaries thatproduce some of the inputs used in theproduction of its products. For example, anautomobile company may own a tire
company, a glass company, and a metalcompany. Control of these threesubsidiaries is intended to create a stablesupply of inputs and ensure a consistent
quality in their final product. It was themain business approach of Ford and othercar companies in the 1920s, who soughtto minimize costs by centralizing the
production of cars and car parts.
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FORWARD VERTICALFORWARD VERTICALINTEGRATIONINTEGRATION
The company sets upsubsidiaries that distribute
or market products to theend market or use theproducts themselves. An
example of this is a moviestudio that also owns achain of theaters.
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12/06/10 IIPM 5
Example of Backward and Forward IntegrationExamp
le of Backward and Forward Integration
BACKWARD INTEGRATION FORWARD INTEGRATION
RAW MATERIAL RAW MATERIAL
INTERMEDIARY MANUFACTURING
ASSEMBLY
INTERMEDIARY MANUFACTURING
ASSEMBLY
DISTRIBUTION
DISTRIBUTION
END CONSUMERSEND CONSUMERS
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BALANCED VERTICALBALANCED VERTICALINTEGRATIONINTEGRATION
The company sets up subsidiaries that bothsupply them with inputs and distributetheir outputs. If you view McDonald's(MCD), for example, as primarily a foodmanufacturer, backwards verticalintegration would mean that they wouldown the farms where they raise the cows,chickens, potatoes and wheat as well asthe factories that processes everythingand turns it all into food. Forwards vertical
integration would imply that they own thedistribution centers for every area and thefast food retailers. Balanced verticalintegration would mean that they own allof the mentioned components.
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USAGE OF VERTICALUSAGE OF VERTICALINTEGRATION:INTEGRATION:
In the strategy developmentprocess, vertical integration maybe consider as strategic choice
When you are analyzing industrydynamics, using porters fiveforces model, vertical integrationis in action to decrees the
bargaining power of supplies andcustomer.
Vertical integration may be a path
for reducing transaction cost.
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COMPANIES USING VERTICALCOMPANIES USING VERTICALINTEGRATIONINTEGRATION
1) American Apparel :American Apparel is a fashionretailer and manufacturer that actually advertisesitself as vertically integrated industrial company.
The brand is based in Los Angeles, where from asingle building they control the dyeing, finishing,designing, sewing, cutting, marketing anddistribution of the company's product.
2) Reliance : The Indian petrochemical giant Reliance is a great
example of vertical integration in modern business.Reliance has now entered Oil and Gas sector along
with retail sector. Thus now Reliance has a completevertical product portfolio from Oil/Gas production,Refining (owning one of World's largest refinery at
Jamnagar, Petrochemicals, synthetic garments andretail outlets.
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STRENGTHS OF VERTICALSTRENGTHS OF VERTICALINTEGRATIONINTEGRATION
Economies of scale
Economies of scope
Cost reduction
Competitiveness Reduce threat from powerful suppliers
and customer
Higher degree of control over the entirevalue chain
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LIMITATIONS OF VERTICALLIMITATIONS OF VERTICALINTEGRATIONINTEGRATION
The degree of vertical integration canhardly be determined via quantitativemeans.
Load and capacity balancing between theold and the new activities may be hardto achieve.
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BENEFITS OF VERTICALBENEFITS OF VERTICALINTEGRATIONINTEGRATION
INTERNAL GAINS: Lower transaction costs Synchronization of supply and demand along the chain of
products
Lower uncertainty and higher investment Ability to monopolize market throughout the chain
by market foreclosure
INTERNAL LOSS: Higher monetary and organizational costs of switching to
other suppliers/buyers
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CONTDCONTD
BENEFITS TO SOCIETY:
Better opportunities for investment growth throughreduced uncertainty.
LOSSES TO SOCIETY:
Monopolization of markets
Rigid organizational structure, having much the sameshortcomings as the socialist economy (cf. JohnKenneth Galbraith's works)
Monopoly on intermediate components (with opportunityfor price gouging) leads to a throwaway society.
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DYNAMIC TECHNOLOGYDYNAMIC TECHNOLOGY
Some argue that vertical integration willeventually hurt a company because whennew technologies are available, the companyis forced to reinvest in its infrastructures in
order to keep up with competition. Some saythat today, when technologies evolve veryquickly, this can cause a company to investinto new technologies, only to reinvest ineven newer technologies later, thus costing acompany financially. However, a benefit ofvertical integration is that all the componentsthat are in a company product will workharmoniously, which will lower downtime and
repair costs.
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Vertical MarketingVertical MarketingSystemSystem
A distribution channel structure in whichproducers, wholesalers, and retailersact as a unified system.
One channel member owns the other, hascontracts with them, or has so much
power that they all cooperate.
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Types of Vertical Marketing SysteTypes of Vertical Marketing Syste
CorporateCommonOwnershipatDifferent
LevelsoftheChannel
CorporateCommonOwnershipatDifferent
LevelsoftheChannel
Contractual
ContractualAgreementAmongChannelMembers
ContractualContractualAgreementAmong
ChannelMembers
AdministeredLeadershipisAssumedbyOneor
aFewDominantMembers
AdministeredLeadershipisAssumedbyOneor
aFewDominantMembers
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Conventional Distribution Channel vs.Conventional Distribution Channel vs.
Vertical Marketing SystemsVertical Marketing Systems
VerticalVerticalmarketingmarketing
channelchannel
Manufacture
r
Retailer
ConventioConventionalnal
marketingmarketingchannelchannel
Consumer
Manufacturer
Consumer
Retailer
Wholesaler
W
ho
lesa
ler
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Vertical IntegrationVertical IntegrationStrategiesStrategies
Vertical integration extends a firms competitivescope within same industry
Backwardinto sources of supply
Forwardtoward end-users of final product
Can aim at either fullorpartialintegration
InternallyPerformedActivities,Costs, &Margins
Activities,Costs, &
Margins ofSuppliers
Buyer/UserValue
Chains
Activities, Costs,& Margins of
Forward ChannelAllies &
Strategic Partners
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Strategic Disadvantages ofStrategic Disadvantages ofVertical IntegrationVertical Integration
Boosts resource requirements Results in fixed sources of supply and less
flexibility in accommodating buyer demands
for product variety Poses problems of balancing capacity at each
stage of value chain
May require radically different skills /
capabilities Reduces manufacturing flexibility, lengthening
design time and ability to introduce new
products
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Advantages ofAdvantages ofOutsourcing StrategiesOutsourcing Strategies
Outside specialists can perform the activity betteror more cheaply
Activity is not crucial to achieving competitiveadvantage
Reduces risk exposure to changing technologyand/or changing buyer preferences
Streamlines operations to
Cut cycle time
Speed decision-making Reduce coordination costs
Allows firm to concentrate on its core business
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Cooperative StrategiesCooperative Strategies
Companies sometimes use strategic alliancesor strategic partnerships or collaborative
agreements to complement their own strategicinitiatives and strengthen their competitiveness.
Such cooperative strategies go beyond normalcompany-to-company dealings but fall short of
merger or formal joint venture
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Why Are Strategic AlliancesWhy Are Strategic AlliancesFormed?Formed?
To collaborate on technology development or
new product development
To improve supply chain efficiency
To gain economies of scale in production and/ormarketing
To fill gaps in technical or manufacturing
expertise
To speed new products to market To acquire or improve market access
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Growth Strategies: Penetration, Product-Market Expansion, Vertical Integration22
The Impact of Growth Strategies
SignificantGrowth
Strategies
BigIdeas
Incremental
GrowthStrategies
New FlavorReminders to use
Enter New CountryNew generation
product
DisneylandNiketown
Figure 13.3
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HOLLYWOODHOLLYWOOD
Hollywood companiestend to be verticallyverticallyintegratedintegrated.
This means they willusually own a number a of
stages involved in gettinga film to an audience.For example, a studio mayown the productioncompany (thetheproduction stageproduction stage), the
distributor (distributiondistributionand marketing stageand marketing stage)and sometimes even thecinema (the exhibitionthe exhibitionstagestage).
HOLLYWOOD STUDIO
What would be the advantage of vertical integration for a Hollywood Studio?What would be the advantage of vertical integration for a Hollywood Studio?
ProductionCompany
Distributor Cinema
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A HOLLYWOD EXAMPLE OFA HOLLYWOD EXAMPLE OFDISTRIBUTIONDISTRIBUTION
LOVE ACTUALLYLOVE ACTUALLY
How many differentdistributors would you
expect to be involvedwith this film?
Universal Pictures (2003) (USA) (theatrical)
Argentina Video Home (20 04 ) (Arge nt ina ) (DVD)
Argentina Video Home (20 04 ) (Arge nt ina ) (VHS)Film e s Luso m und o (200 3) (Portug al) (the at rical)
Mars Dist ribu tion (2003) (France) (theatrical)
RTL Entertainment (20 06 ) (Ne th e rla nd s) (TV) (first
national airing) (RTL5)
Studio Cana l (2003) (France) (theatrical)
Unite d Inte rna tiona l Pictu res (UIP) (2003) (Argentina)
(theatrical)
Unite d Inte rna tiona l Pictu res (UIP) (200 3) (Switzerland )
(theatrical)Unite d Inte rna tiona l Pictu res (UIP) (2003) (Germa ny)
(theatrical)
Unite d Inte rna tiona l Pictu res (UIP) (2003) (Spain)
(theatrical)
Unite d Inte rna tiona l Pictu res (UIP) (2003) (UK)
(theatrical)
Unite d Inte rna tiona l Pictu res (UIP) (2003) (Italy)
(theatrical)
Unite d Inte rna tiona l Pictu res (UIP) (2003) (Neth er lands)(theatrical)
Unite d Inte rna tiona l Pictu res (UIP) (2003) (Singa pore)
(theatrical)
United Inte rnat iona l Picture s (200 4) (Jap an ) (the a trical)
Universal Home Video (20 04 ) (Brazil) (DVD)
Universal Home Video (20 04 ) (Brazil) (VHS)
Universal Pictures (Spain) (20 04 ) (Spa in) (DVD)
Unive rsa l Picture s Ben elux (200 4) (Neth e rla nds ) (DVD)
(VHS)Unive rsa l Picture s Can ad a (200 4) (Cana da ) (DVD) (as
Unive rsa l Studios Cana da
There are 21 in total if you include bothcinema and home video distributors.
14 of these companies are owned byUniversal (or part owned as UIP is jointowned with Paramount) a greatexample of vertical integration!
http://www.imdb.com/company/co0005073/http://www.imdb.com/company/co0005073/http://www.imdb.com/company/co0005073/http://www.imdb.com/company/co0031085/http://www.imdb.com/company/co0031085/http://www.imdb.com/company/co0012065/http://www.imdb.com/company/co0071037/http://www.imdb.com/company/co0112383/http://www.imdb.com/company/co0047476/http://www.imdb.com/company/co0097402/http://www.imdb.com/company/co0125155/http://www.imdb.com/company/co0142899/http://www.imdb.com/company/co0102896/http://www.imdb.com/company/co0074139/http://www.imdb.com/company/co0040026/http://www.imdb.com/company/co0110120/http://www.imdb.com/company/co0015307/http://www.imdb.com/company/co0019721/http://www.imdb.com/company/co0091071/http://www.imdb.com/company/co0091071/http://www.imdb.com/company/co0055622/http://www.imdb.com/company/co0115440/http://www.imdb.com/company/co0056049/http://www.imdb.com/company/co0056049/http://www.imdb.com/company/co0115440/http://www.imdb.com/company/co0055622/http://www.imdb.com/company/co0091071/http://www.imdb.com/company/co0091071/http://www.imdb.com/company/co0019721/http://www.imdb.com/company/co0015307/http://www.imdb.com/company/co0110120/http://www.imdb.com/company/co0040026/http://www.imdb.com/company/co0074139/http://www.imdb.com/company/co0102896/http://www.imdb.com/company/co0142899/http://www.imdb.com/company/co0125155/http://www.imdb.com/company/co0097402/http://www.imdb.com/company/co0047476/http://www.imdb.com/company/co0112383/http://www.imdb.com/company/co0071037/http://www.imdb.com/company/co0012065/http://www.imdb.com/company/co0031085/http://www.imdb.com/company/co0031085/http://www.imdb.com/company/co0005073/ -
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2009 Pearson Addison-Wesley. All rights reserved. 25
Degree of VerticalDegree of VerticalIntegrationIntegration
A firm that participates in more than onesuccessive stage of the production ordistribution of goods or services is
vertically integrated. A firm may vertically integrate backward
and produce its own inputs.
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2009 Pearson Addison-Wesley. All rights reserved. 26
Degree of Vertical IntegrationDegree of Vertical Integration(cont).(cont).
Contractual vertical restraints when afirms control the actions of the firmswith whom they deal by writing
contracts that restrict the actions ofthose other firms. Such tight relationships between firms are
referred to as quasi-vertical integration.
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2009 Pearson Addison-Wesley. All rights reserved. 27
Produce or BuyProduce or Buy
Five possible benefits from verticalintegration are: lowering transaction costs,
ensuring a steady supply, avoiding government intervention,
extending market power to anothermarket, and
eliminating market power.
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Advantages ofAdvantages ofOutsourcing StrategiesOutsourcing Strategies
Outside specialists can perform the activity betteror more cheaply
Activity is not crucial to achieving competitiveadvantage
Reduces risk exposure to changing technologyand/or changing buyer preferences
Streamlines operations to
Cut cycle time
Speed decision-making Reduce coordination costs
Allows firm to concentrate on its core business
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2009 Pearson Addison-Wesley. All rights reserved. 29
Lowering TransactionLowering TransactionCosts.Costs.
transaction costs - the costs of tradingwith others besides the price,including the costs of writing and
enforcing contracts.
opportunistic behavior - takingadvantage of someone when
circumstances permit.
asymmetric information -the
knowledgeable firm may takeadvanta e of the relativel i norant
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2009 Pearson Addison-Wesley. All rights reserved. 30
Ensuring a Steady Supply.Ensuring a Steady Supply.
just-in-time -system of havingsuppliers deliver inputs at the timeneeded to process them, thus
minimizing inventory costs andavoiding bottlenecks.
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2009 Pearson Addison-Wesley. All rights reserved. 31
Avoiding GovernmentAvoiding GovernmentIntervention.Intervention.
A vertically integrated firm avoidspricecontrolsby selling to itself.
Firms also integrate to lower their taxes
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2009 Pearson Addison-Wesley. All rights reserved. 32
Extending Market Power.Extending Market Power.
By vertically integrating, a firm may beable to increase its monopoly profitsby price discriminating or by
monopolizing.
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