Strategic analysis of vertical integration

7/28/2019 Strategic analysis of vertical integration

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The strategic analysis ofVertical integration:


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Vertical integration is the combination oftechnologically distinct production, distribution,selling , and /or other economic processeswithin the confines of single firm.

It represents a decision by the firm to utilize

internal or administrative transactions ratherthan market transaction to accomplish itseconomic purposes.

For e.g. a firm with its own sales force couldcontracted, through the market, anindependent selling organization to supply theselling services it requires.


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Strategic benefit and costs of

Vertical Integration

Vertical integration has important generic

benefits and costs which need to be

considered in any decision.

In a vertical chain, the upstream firm is

the selling firm and the downstream firmis the buying firm in the vertical chain


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Strategic beneficiate of

Integration

Economics of integration: the most

commonly citedbenefit of vertical

integration is the achievement ofeconomics , or cost savings in join

production, sales , purchasing control

and other areas.


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Economies of combined

operations

By putting technological/distinct operations

together, the firm can sometimes

gain efficiencies.

Facilities can be co-located

Step eliminates transportation costs which

are substantial for a hazardous and

difficult logistic plan


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Economics of internal control

and coordination

Costs of Scheduling, coordinating

operations, and responding to emergencies

may be lower if the firm is integrated.

Adjacent location of the integrated

facilitates coordination and control

Such economies of control can reduce idle

time, the need for inventory and need for

personnel in the control function.


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Economics of internal control

and coordination

Costs of Scheduling, coordinating

operations, and responding to emergencies

may be lower if the firm is integrated.

Adjacent location of the integrated

facilitates coordination and control

Such economies of control can reduce idle

time, the need for inventory and need for

personnel in the control function.


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Economies of information

Integrated operations may reduce need

for collecting some types of information

about the market or likely by may reduce

the overall cost of saving information.

Market information may well flow more

freely in an organization then through aseriesof independent participants.


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Economies of avoiding the

market

By integrating the firm potentially saves

on some of the selling, price shopping,

negotiating transaction costs of markettransactions.


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Economies of stable relationship

Specialized procedures for dealing withcustomer or supplies can include

dedicated, specialized logistical

systems, special packaging, uniquearrangements for record keeping and

control as also potentially cost

saving ways of interacting.

It is possible that stability of the

relationship will allow the upstream

unit to tune its


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Characteristics of vertical

integration A firm with a strategy of low cost

production may place a greater value on

achieving economics of all types.

Similarly, a firm with weakness in

marketing may save more by avoiding

market transactions

Tap into technology

Offset bargaining power and input cost


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integration If a firm is dealing with suppliers or

customers who wield significant bargaining

power and reap returns on investment in

excess of the opportunity cost of capital

Enhanced ability to differentiate

Vertical integration can improve the ability

of the firm to differentiate itself from others by

offering a wider slice of value added

services under the control of


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integration Elevate entry and mobility barriers

Benefits to the integrated firm vis-a- vis an

integrated firm are in form of better prices,lower costs and lower risks.

Extra High return business

Vertical integration will increase overall

return on investment.


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integration Defend against foreclosure

Widespread integration by competitors

can tie up many of the sources of supply

on devisable customers or retailoutlets

Will lead to problems for unintegratedfirms.


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Strategic costs of integration

Strategic costs include:-

Entry Cost

Flexibility

Balance

Ability to manage the integrated firm

Use of internal organizational incentives/

market incentives.


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Cost of overcoming mobility barriers

Vertical integration obviously requires thefirm to overcome the mobility barriers to

compete in the upstream or downstream

barriers

Overcoming barriers caused by cost

advantages from proprietary technology onfavorable source of raw materials can be a

cost of vertical integrations incentives.


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Increased operating language

Vertical integration increases the

proportion of a firms costs that are fixed

If a business has low fixed costs, the

effective increase in operating leverage

can be minor


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Reduced flexibility to change

partners

Vertical integration implies that the

fortunes of a business unit are at least

partly tied to the ability of its in house

suppliers on customers (who might itsdistribution channel) to compete successfully.

Extent of this risk depends on a realisticassessment of the likelihood that the in

house supplier or customer will get into

trouble and the likelihood of external or

internal changes that will require adaptation


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Higher overall exit barriers

Integration that further increases the

specialization of assets, strategic

interrelationships may raise the overall exitbarriers


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Capital investment requirement

Vertical integration consumes capital

resources, which have an opportunity

cost within the firm, whereas dealing withan independent entity uses investment

capital of outsiders


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Foreclosure of access to supplies or

consumer research or know how

Integration usually means that a

company must accept responsibility for

developing its own technologicalcapability rather than piggybacking on

others

If it does not the suppliers are often

willing to support the firm aggressively with

research, engineeringassistance and the


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Maintaining balance

Productive capacities of the upstream

and downstream units in the firm must

be held in balance or potential problems

arise

Vertical stages go out of balance for a

variety of reasons. Technological change inone stage may require changes in

methods that effectively increase its

capacity relative to the other stage or

changes in product mix and quality may


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Dulled incentives

Vertical integration means that buying and

selling will occur through a captive relation

Declining house can reduce incentives

Incentives for the upstream movement mabe dulled because it sells in house instea

competing for the business

Conversely, the business buying internally

from another unit with company may not

bargain as it hard as its would with outside

vendors.


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Differing Managerial Requirements

Business can be differed in structure,

technology and management despitehaving a vertical relationship.

Manufacturing and retailing arefundamentally different

A management capable of operating one

part of the vertical chain very well may beincapable of effectively managing the

other, to put the point in its most extreme

form.


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Designing the Sales Force

Most industrial companies rely heartily

on a professional sales force to locateprospects, develop them into customers

and grow the business, or they hire the

manufacturers representatives andagents to carry out the direct selling task.

In addition many consumer companies

use a direct selling force: insuranceagents, stockbrokers, and

distributors work for direct sales

organization such as Avon, Amway,


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Sales Representatives

Deliverers A salesperson whose major

task is the delivery of a product (water,fuel)

Order taker- A salesperson who acts

predominantly as an inside order taken(salesperson standing behind the counter)

or outside order taker (the soap salesperson

calling on the supermarket manager) Missionary- a salesperson who is not

expected to take an order but whose major

task is to build goodwill or educate the


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Sales Representatives

Technician- A salesperson with a high level of

technical knowledge (the engineeringsalesperson who is primarily a consultant to

client companies)

Demand Quote- A salesperson who relies oncreative methods for selling tangible products

(Vacuum cleaners, cleaning brushes) or

intangibles (insurance, advertising and

education)

Solution Vendor- A salesperson whose

expertise is in solving of a customers

problem, often with a system of the


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Sales Force Objectives and Strategy

Prospecting Searching for prospects

or leads

Targeting deciding how to allocate

their time among prospects and

customers

Communicating Communicating

information about companysproducts and services

Selling Approaching, presenting ,

answering questions, occurring


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Sales Force Objectives and Strategy

Servicing Providing various services

to the customers consulting on problems,rendering technical assistance,

arranging finance, expending delivery.

Information gathering Conducting

market research and doing intelligence

work

Allocating Deciding which customers will

get scarce products during product


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Sales Force Structure

One product line to one and usingindustry with customers in many

locations would use a territorial/

structure.

A company which sells many products

to many types of customers might need a

product or market structure


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Sales Force Size

First establish the number ofcustomers to be reached , then use a work

board approach to establish

Sales force size E.g.

1000 A- Accounts

2000 B- Accounts / Country Status

A account require 36 calls a year

B account require 12 calls a year

Total calls A+B = 60000 (36000+ 24000)

Average up con make 1000 call a year

No. of salesperson: 60000/1000 =60


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Sales Force Compensation

Salary

Variable amount (commissions, bonus

on profit sharing )

Expense allowance

Benefits


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Managing the sales force

Recruiting and selecting representatives

Training and supervising sales

representatives

Sales reproductively

Motivating sales representative

Evaluating sales representatives


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Principles of Personal Selling

Prospecting and Qualifying- Identify and qualifying prospects

- Hot/ warm/ cold categorization

Pre- approach- Learn about the prospect

- Decides on best contract approach which

might he a personal visit, a phone call or a

letter.

Presentation and demonstration

- AIDA GET attention

- Hold Interest


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Principles of Personal Selling

Overcoming objection Closing

Follow up and maintenance

Miscellaneous-Negotiation

- Relationship Marketing


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International Market Promotion

Product policy and planning

- Product decision is among the first

decision a marketing manager makes

in order to develop a marketing mix.


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International Product planning

Product objectives emerge from the host

country and corporate objectives arecombined the business definition.

The companys goals usually are stability,

growth, profits and return on investment.Stated differently, the corporate objectives

may be defined in terms of activities (the

manufacture of a particular product or

export to a particular market), financial

indicators (to achieve a targeted return on

investment), desired position (its market

share and relative market leadership and all

Perspectives of International


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Perspectives of International

Product Planning

Business definition of the

country

Product Objectives

Product offering

Marketing Mix

Customer Satisfaction

Country

ObjectivesCorporate

Objectives


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Product Design Strategy

Decision criteria

Nature of Product

Market

Development

Cost/ Benefit

relationship

Legal requirements

Competition

Support system

Physical Environment

Market conditions


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Standardization

A recent study on the subject lendssupport to the high propensity to

standardize all or parts of marketing

strategy in foreign markets.

An extremely high degree of

standardization appears to exist in landnames, physical characteristics of product

and packaging.


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Rewards of Adaptation

Although standardization offers benefits toomuch attachment to standardization can

be counterproductive.

Marketing environment from country to

country, and thus a standard product

originally conceived and developed in the

US may not really match theconditions in each and every market.


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Developing an International

Product line

Extension of domestic line

Introducing additional products to the

international line

Introducing a new product in a host country


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New Product Development

Process (Six Steps)

Idea

Screening

Evaluation Prototype product

Market testing

Entry


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Management of Product line

A few generalizations are required to be

made for managing an international

product line:- Product segmentation

Product design

Product quality

Product innovation


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R & D in the home country

Critical mass and economies of scale

Easier communication

Better production of know-how

More leverage with host government

Ease of control of coordination


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Adoption and diffusion of

New Products

Customers DO not instantly buy new products.They go through a step by step mental process

of acceptance or rejection of any new product.

Awareness (Exposure to a new product)

Knowledge

Evaluation

Trail

Adoption


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Product related characteristic

Relatives advantages

Compatibility

Complexity Divisibility

Communicability

Customer innovativeness

Need perception

Economic ability


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Foreign product diversificatio

Diversification refers to seekingunfamiliar products or unfamiliar markets

or both for expansion.

Diversification can also be a risky

strategy and a company should choose

this path only when current product/market orientation seems to provide no

further opportunities for growth.


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Brand Strategy

B d lt ti


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Brand alternatives

An overseas marketer has several

alternative ways to decide on thebrand name:-

Use one name with NO adaptation to local

markets Use one name but adapt and modify for

each local market

Use different names in different markets forsame products

Use the company name as brand nameunder one house style on the corporateumbrella approach.

B d Pi


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BrandPiracy Counterfeiting

Lows pertaining to bound piracy in many countriesare loose with little punishment for shady practices

Three forms of piracy

- Imitation: copying an established hand.

-Faking refers to identifying the fraudulent productwith a symbol, logo or brand name that is verysimilar to the famous brand.

- Piracy through preemption of brand names isfeasible in those countries where the low permitswholesale registration of brand names. InMonaco for e.g. a person registered 300 famous

brand names such as Chase Manhattan, BankersTrust Scare Texaco NBC amd CBS.

B d Pi


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BrandPiracy Counterfeiting

Lows pertaining to bound piracy in many countriesare loose with little punishment for shady practices

Three forms of piracy

- Imitation: copying an established hand.

-Faking refers to identifying the fraudulent productwith a symbol, logo or brand name that is verysimilar to the famous brand.

- Piracy through preemption of brand names isfeasible in those countries where the low permitswholesale registration of brand names. InMonaco for e.g. a person registered 300 famous

brand names such as Chase Manhattan, BankersTrust Scare Texaco NBC and CBS.

Private Branding for


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Foreign Markets International Packaging Promotional

100% takes into account requirements of

four groups of people-

Customers Shippers

Distributors Host Government

International warrantees and services



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Foreign MarketsWarranties

Competitive tool

Grantee from the manufacturer that theproduct will perform as stipulated

Standard warranty vis--vis customized

warranty- Nature of the market

- Environmental conditions (tear, wear)

etc.



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Foreign Markets Services

Constitute an offer to maintain the

original product through occur having,

replacement of parts adjustments and the

like.

- Formulation of a service policy

requires objective

assessment of needs.

Rationale for seeking


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Rationale for seeking

comparative advantage Nations seek to increase the material

standard of living of its people.

Living standards increase as a functionof productivity

With greater productivity , the sameamount of labor yields more goods andservices

As productivity increases, greatermaterial wealth results

Productivity leads to specialization of

production

T d B i


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Trade Barriers

Two types of Trade Barriers

Tariffs barriers

Non-tariffs barriers

T d B i


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Trade Barriers

Tariffs refer to taxes levied on goods

moved between nations

Most important of these is the tax usuallycalled the customs duty, which is levied by

the importing nation A tax may also be imposed by the

exporting nation and is called an exporttax.

A country through which goods pass ontheir way to their destination may

impose a transit tax.

N.B Real purpose behind trade barriers is

Arg ments for protection


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Arguments for protection

Keep money at home argument transferof national wealth in exchange with

another nation for goods.

Home market argument

Equalization of costs of production

argument. To make local goods

competitive against imports which may be

cheaper due to technological advantages

Employment argument



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Anti- dumping argument

Impart industry argument

Bargaining and retaliation argument to

seek reduction of tariffs by other country

or to retaliate against another country

National security argument

Tariff Barriers


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Tariff Barriers

Different nations handle tariff barriersdifferently

A country may leave a single tariff

system for all goods from all sources.

This is called uni-linear or single-

column tariff.

Another type of tariff is the general

conventional tariff. This tariff applies to

all nations except those that have

tariff treaties (or a convention to that

effect) with a particular country.

Tariff Barriers


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Tariff Barriers

A tariff may be worked out on the basisof a tax permit, called specific duty or

as a percentage of the item, which is

referred to as advalorem duty. Sometime

both may be levied on a specific item as

combined duty.

Non Tariff Barriers


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Non Tariff Barriers

They include:-

Quotas

Import equalization taxes

Road taxes

Laws giving preferential treatment to

domestic suppliers, administration ofanti dumping measures, exchange

controls, and a variety of invisible tariffs

that impede trade

Principal Non Tariff Barriers


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Principal Non Tariff Barriers

Specific limitation on trade

Customs and administrative entry

procedures

Standards

Government participation in trade

Charges on import

Other categories.

GATT (General agreement on


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( gTariffs and Trade)

Recent was Uruguay round

addressed issues such as tariff servicesand trade related aspects of intellectualproperty and investment measures.

Uruguay round was completed on Dec15, 1993. (After 07 years of

negotiations)

117 countries (including the US signedthe agreement)

Motive: to reduce trade barriers andcreate more comprehensive and

GATT (General agreement on


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( gTariffs and Trade)

Unlike GATT, WTO panel decisions are binding.

If one nation a makes a complaint to the WTOthat another nations laws or decisions are non-binding and in violation.

Agreement was signed in April 94

Went into operationalisation w.e.f. 01 Jan. 95Agreement created WTO (World Trade

Organization) on 01 Jan; 95

WTO implements the agreement and provides a

forum for:- Negotiating additional reduction of trade barriers

Setting policy disputes

Enforcement of trade rules

WTO


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World trade organization rules apply to90% of world trade

Stronger enforcement mechanism in

WTO Member countries as on date are 125

(nearly the whole of the world except

China WTO works to eliminate non- tariff

barriers, can be used to challenge

environment health and other WTO


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Stronger enforcement powers representa shift in power from citizens and national

government to unelected bureaucrats.

Unlike GATT, WTO panel decisions are

binding. If one nation makes a complaint

to the WTO that another nations laws or

decisions are non-binding and inviolation of WTO rules, WTO can enforce

WTO standards

Marketing Memo


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Marketing Memo

Helping stores to sell!

Attract shoppers and keep them in thestore

Honourthe transition zone :- Make surethere are clear sight lines.

Make merchandise available to reach &touch

Men do not ask questions as a rule.

Women need space

Make checkout easy

Retail Category Management


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Retail Category Management

Step What is meansDefine the category Draw the line between product

categories. Alcohol & soft drinks as

one beverage category ?? or

separately managed

Figure out the role How des the category fills / fits into thestore ? destination category vis--vis

fill-ins

Assess performance Analyze sales data

Set goals Agree on category objectives

Choose the audience Sharpen focus for maximum effect

Figure out the tactics Decide product selection promotion

merchandising and achieve category

goals

Implement the plan Set time table / execute

Growth and type of


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ypwholesaling

Wholesaling will retain importance

and see decent growth due to spurt

in consumer purchasing

Growth and type of


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ywholesaling

Merchant wholesalers

- Independently owned businesses

- Will take title to merchandise



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Handles:

Full service wholesalers Carry stock maintain, a sales force, offer

credit , make deliveries , providemanagement assistance

Limited service wholesalers

- Cash and carry wholesalers sell a limitedline of fast moving goods to small

retailers for cash- Truck wholesalers sell and delivers alimited line of semi- perishable goods

to supermarkets, goods stores hospitals etc.


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Functions

Selling and Promoting: wholesalers salesforces help manufactures reach many

small business, customers at relatively lowcost.

Buying and assortment building

Bulk breaking

Warehousing

Transportation

Financing

Risk bearin

Functions


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Functions

Market Information

Management services and counseling

Drop shippers secure bulk industries

such as coal, heavy equipment etc. Rack jobbers serve grocery retailers in

non- food items.

Mail order wholesalers sent catalogues toretail, industrial and institutional

customers. Orders are filled and sent by

mail, plane or truck

Functions


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Functions

Brokers and agents- Facilitate buying

selling- limited functions

Manufacturers and retailers branches andoffices- wholesaling operations are

conducted by sellers or buyers themselvesrather than through independentwholesalers.

Specialized wholesalers- Agricultural assemblers (output of

many farms)

- Petroleum bulk plants and

Factors affecting demand and


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supply of U.S Dollars

1. Factors increasing supply ofUS dollars in world markets.

2. Impact of merchandise

3. Impact of gold and silver

4. Payments to foreign ships for

straight and passengerservice.

5. American tourist expenditure

abroad.

6. Banking and all other financial

charges payable to foreigners

7. Interest and dividends due on

American securities held

aboard

1. Factors increasing demand forU.S. Dollars in world Markets.

2. Export of Merchandise

3. Exports of gold and silver

4. Foreign tourists expenditures

in the US5. Banking and other financial

charges receivable form

foreigners

6. Interest and dividends due on

foreign securities in US

7. New sale of American

securities abroad.



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supply of U.S Dollars

Supply

New Purchase of foreign

securities

Repurchase and

redemption of American

securities held abroad

Transfer of American

balances to foreign bands

US govt. grants and loans

Demand

Repurchase and

redemption of foreign

securities held here (U.S)

Transfer of foreign balances

to American banks.

International Monetary System


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Trade settlements involves topic suchas determination of foreign exchange

rates, balance of payments, foreign

exchange transactions, internationalfinancial flows and international

financial and trade institutions.

Each country has its own currencythrough which it expresses the value

of its goods



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For international trade settlements,however, the various currencies of theworld must be transformed from one

into the other. This is accomplished by

foreign exchange markets.1. Negotiations to establish postwar international

monetary system took place atBrethonwoods, New Hampshire in 1944.

2. Economically disastrous post war period.

3. Recommendations:



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Each nation should be at liberty to usemicro-economic policies for full

employment (Tent ruled out return to

Gold standard) Free floating exchange rates could not

work extremes of both permanently fixed

and floating rates should be associated. Monetary system should recognize that

exchange rates were both a national

and international concern



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Sustained a rapidly increasing volume

of trade and investment.

Displayed flexibility in adapting to

changes in international commerce

Proved to be efficient

Proved to be hardy

Allowed a growing degree ofinternational cooperation established a

capacity to accommodate reforms and

improvements.

Foreign Exchange


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Foreign Exchange

Foreign exchange is the monetary

mechanism by which transactionsinvolving two or more currenciestakes place

It also refers to exchange of onecountrys money for another countrysmoney

Foreign exchange transactions present

two problems.- Firstly each country has its own

methods and procedures for effective

foreign exchange- usually developed by

Historical perspective on making


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p p g

payments across national boundaries:-

Gold standard refers to using gold as themedium of exchange for effecting foreigncommercial transactions. Before World

War- I, most countries followed the goldstandard.

Gold exchange standard: this means thatthe foreign exchange rate of a currencyis set in relation to that countrys goldholdings

Gold bullion standard amounts to holdingan adequate quantity of gold in reserve in bar

or bullion form to settle international

transactions at the level of government

ac ors a ec ng eman an supp yof US Dollars


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of US Dollars

Factors increasing supply of US Dollars in

world Markets

Factors increasing demand for US Dollars

in World Markets

Import of Merchandise Export of Merchandise

Imports of gold and silver Exports of gold and silver

Payments to foreign ships for passenger

service

Foreign tourists expenditures in the US

American tourist expenditure abroad Banking and other financial charges

receivable from foreigners

Banking and all other financial charges

payable to foreigners

Interest and dividends due on Foreign

securities in USA

Interest and dividends due on American

Securities held abroad

New sales of American Securities abroad

New purchase of foreign securities Repurchase and redemption of foreign

securities held here (US)

Repurchase and redemption of American

securities held abroad

Transfer of foreign balance to American

Banks

Transfer of American balance to foreign banks

US Govt. grants and loans

Balance of Payment


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y

Balance of Payment


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Balance of Payment

The balance of payments of a countrysummarizes all the transactions that havetaken place between its residents and foreignersin a given period, usually a year! Transactionsrefers to imports and exports of goods andservices, lending and borrowing of funds,

remittance, government and militaryexpenditures.

Residents: includes all individuals and businessenterprises, including financial institutions, that

are permanently residing within a countrys

borders as well as government agencies at alllevels.

In other words balance of payments reflect thetotality of a countrys economic relations with the

rest of the world .

Factors affecting demand and supplyof US Dollars


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Most currencies today areinconvertible. This refers tocurrencies that cannot converted orexchange for other currencies.

Currencies may be labeled hard andsoft

Hard- in great demand

Soft- relatively easily available.Developing nations currencies aregenerally soft.

of US Dollars

Strategic analysis of vertical integration

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