final distribution ppt

8/8/2019 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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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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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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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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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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Avoiding GovernmentAvoiding GovernmentIntervention.Intervention.

A vertically integrated firm avoidspricecontrolsby selling to itself.

Firms also integrate to lower their taxes


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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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