Autobytel.com

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PublishClassified

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Sourcing

Processing

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Etc.

Raw MaterialManufacture

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Design

Manufacture

Etc.

Component Manufacture

Design

Marketing

Manufacture

Etc

Assembly

Marketing

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Etc.

Distribution

Parts Inventory

Training

Servicing

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Maintenance

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Used Resale

Value SystemValue System

Vertical scopeVertical scope

Vertical scope of the firm is an Vertical scope of the firm is an important consideration in corporate important consideration in corporate strategy to sustain advantage over strategy to sustain advantage over competitioncompetition

Vertical scope is the extent of firm’s Vertical scope is the extent of firm’s vertical integration vertical integration backwardsbackwards to its to its supply chains and supply chains and forwardforward to it to it distribution chain within its own distribution chain within its own value systemvalue system

Backward Integration Backward Integration Manufacturing FirmManufacturing Firm

The point from your firm’s value The point from your firm’s value chain backward to your component chain backward to your component supplier’s value chain , backward to supplier’s value chain , backward to your raw material supplier’s value your raw material supplier’s value chain within the chain within the samesame value system; value system;

Also known as Upstream SuppliersAlso known as Upstream Suppliers

Forwards Integration Forwards Integration Manufacturing FirmManufacturing Firm

The point from your firm’s value The point from your firm’s value chain forward to your distributor's chain forward to your distributor's value chain , forward to your retail value chain , forward to your retail value chain to sell to the consumer value chain to sell to the consumer within the within the samesame value system value system

Also known as Downstream Also known as Downstream DistributorsDistributors

Background to VI Background to VI Mergers and AcquisitionsMergers and Acquisitions

The phrase The phrase mergers and acquisitionsmergers and acquisitions (abbreviated (abbreviated M&AM&A) refers to the aspect ) refers to the aspect of corporate strategy, corporate finance of corporate strategy, corporate finance and and managementmanagement dealing with the dealing with the buying, selling and combining of buying, selling and combining of differentdifferent companiescompanies that can aid, that can aid, finance, or help a growing company in a finance, or help a growing company in a given industry grow rapidly without given industry grow rapidly without having to create another business having to create another business entity.entity.

MergersMergers A A mergermerger is a tool used by companies for the purpose is a tool used by companies for the purpose

of expanding their of expanding their operationsoperations often aiming at an often aiming at an increase of their long term profitability. Usually increase of their long term profitability. Usually mergers occur in a consensual (occurring by mutual mergers occur in a consensual (occurring by mutual consent) setting where executives from the target consent) setting where executives from the target company help those from the purchaser in a company help those from the purchaser in a due diligencedue diligence process to ensure that the deal is process to ensure that the deal is beneficial to both parties. beneficial to both parties.

Acquisitions can also happen through a Acquisitions can also happen through a hostile takeoverhostile takeover by purchasing the majority of by purchasing the majority of outstanding shares of a company in the open outstanding shares of a company in the open marketmarket against the wishes of the target's board. One form of against the wishes of the target's board. One form of protection against a hostile takeover is the shareholder protection against a hostile takeover is the shareholder rights plan, otherwise known as the "rights plan, otherwise known as the "poison pillpoison pill".".

MergersMergers In In businessbusiness or or economicseconomics a a mergermerger is a is a

combination of two or more combination of two or more companiescompanies into one into one larger company. Such actions are commonly larger company. Such actions are commonly voluntary and involve voluntary and involve stock swapstock swap or cash or cash payment to the target. Stock swap is often used payment to the target. Stock swap is often used as it allows the shareholders of the two as it allows the shareholders of the two companies to share the risk involved in the deal. companies to share the risk involved in the deal.

A merger can resemble a A merger can resemble a takeovertakeover but result in a but result in a new company name (often combining the names new company name (often combining the names of the original companies) and in new of the original companies) and in new brandingbranding; ; in some cases, terming the combination a in some cases, terming the combination a "merger" rather than an acquisition is done "merger" rather than an acquisition is done purely for political or marketing reasons.purely for political or marketing reasons.

Horizontal MergersHorizontal MergersCommunications IndustryCommunications Industry

Horizontal mergersHorizontal mergers take place where take place where the merging companies produce similar the merging companies produce similar product in the same or similar product in the same or similar industryindustry and operate in differentand operate in different value systems. value systems.

MCV (Cable TV) buys Guam Cell MCV (Cable TV) buys Guam Cell (Phone); (buys PDN (Newspaper); buys (Phone); (buys PDN (Newspaper); buys Sorenson K57 (Radio); buys Directions Sorenson K57 (Radio); buys Directions (Magazine); buys Super Shopper (Ad (Magazine); buys Super Shopper (Ad fliers, brochures).fliers, brochures).

Hrizontal Hrizontal Mergers/IntegrationMergers/Integration

The advantages of horizontal The advantages of horizontal integration can lie in reaching the integration can lie in reaching the customers (if you are already selling customers (if you are already selling them one thing, use the opportunity them one thing, use the opportunity to sell more) but can include to sell more) but can include economies of scale in purchasing, economies of scale in purchasing, logistics and operations. logistics and operations.

Vertical MergerVertical MergerRetail BusinessRetail Business

Vertical mergersVertical mergers occur when two occur when two firms, each working at different firms, each working at different stages in the production of the stages in the production of the same same goodgood, combine; in the , combine; in the same valuesame value system—firm can buy backwards or system—firm can buy backwards or forward in the forward in the same same value systemvalue system

Backward & Forwards Vertical Backward & Forwards Vertical IntegrationIntegration

Joe Tuba Joe Tuba Distribution buys Distribution buys (backwards) Kurt’s (backwards) Kurt’s Tuba Wholesale, Tuba Wholesale, buys Brandon's buys Brandon's Tuba Tree Farm. Tuba Tree Farm.

Joe Tuba Joe Tuba Distributor buys Distributor buys (forward) Retail (forward) Retail Outlets Chodi’s Outlets Chodi’s Market, Payless Market, Payless Markets, Seven-Markets, Seven-Elevens, On the Elevens, On the Run Market.Run Market.

Forwards Vertical Forwards Vertical IntegrationIntegration

Joe Tuba Distributor buys (forward) Joe Tuba Distributor buys (forward) Retail Outlets Chodi’s Market, Retail Outlets Chodi’s Market, Payless Markets, Seven-Elevens, On Payless Markets, Seven-Elevens, On the Run Market.the Run Market.

Joe Tuba Distributor is essentially Joe Tuba Distributor is essentially buying the Distributors to their buying the Distributors to their business to reach his customersbusiness to reach his customers

Competitive AdvantageCompetitive Advantage

The first company to launch a new The first company to launch a new type of product should have a type of product should have a competitive advantage over those competitive advantage over those that start later. Before competitors that start later. Before competitors get started it should have been able get started it should have been able to: to: – build a customer base build a customer base – build a strong brand build a strong brand – develop develop economies of scaleeconomies of scale

Economies of scaleEconomies of scale

Economies of scaleEconomies of scale A larger business is often able to do things more cheaply A larger business is often able to do things more cheaply than a smaller one, other things being equal. Anything that than a smaller one, other things being equal. Anything that helps save costs if the scale of operations increases is an helps save costs if the scale of operations increases is an economy of scale. economy of scale.

There are many sources of economies of scale, which ones There are many sources of economies of scale, which ones are important depend on the industry (and company) in are important depend on the industry (and company) in question. Common economies of scale include: question. Common economies of scale include:

spreading administrative overheads over a bigger spreading administrative overheads over a bigger operation operation

purchasing power to get better deals from suppliers purchasing power to get better deals from suppliers lower costs in manufacturing - e.g., if a bigger lower costs in manufacturing - e.g., if a bigger

factory has factory has lower costs per unit produced lower costs per unit produced better logistics leading to lower distribution costs better logistics leading to lower distribution costs

Economies of scaleEconomies of scaleEconomies of scale are often the Economies of scale are often the claimed justification for claimed justification for mergersmergers and and acquisitionsacquisitions It is important to remember that It is important to remember that economies of scale do not necessarily economies of scale do not necessarily happen because a business is bigger. happen because a business is bigger. For example, combining two completely For example, combining two completely unrelated businesses is likely to lead to unrelated businesses is likely to lead to higher costs (by adding an extra layer higher costs (by adding an extra layer of management) and worse of management) and worse management (by reducing focus on management (by reducing focus on each business and adding bureaucracy).each business and adding bureaucracy).

Alternative to Integration Alternative to Integration OutsourcingOutsourcing

OutsourcingOutsourcing is the contracting out of is the contracting out of work, that was previously done within an work, that was previously done within an organization, to an external provider. organization, to an external provider. There are a number of reasons for There are a number of reasons for outsourcing, the commonest are to enable outsourcing, the commonest are to enable a business to focus on its a business to focus on its core businesscore business or or to to save costssave costs. .

A firm is not buying another firm as in A firm is not buying another firm as in integration, it is just buying a service from integration, it is just buying a service from that firmthat firm

OutsourcingOutsourcing

While many organizations can both While many organizations can both reduce costs and improve reduce costs and improve management by outsourcing, there management by outsourcing, there are also disadvantages:are also disadvantages:– There is a loss of control involved in There is a loss of control involved in

outsourcing, as the function outsourced is outsourcing, as the function outsourced is no longer under direct control. no longer under direct control.

– Outsourcing also exposes the Outsourcing also exposes the organization doing the outsourcing to the organization doing the outsourcing to the risk that its supplier may fail to deliver, or risk that its supplier may fail to deliver, or to deliver satisfactorily. to deliver satisfactorily.