Page 122 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Strategic Management

Notes Integrative Strategies

Integration basically means combining activities relating to the present activity of a firm. Such
a combination can be done on the basis of the industry value chain. A company performs a
number of activities to transform an input to output. These activities include right from the
procurement of raw materials to the production of finished goods and their marketing and
distribution to the ultimate consumers. These activities are also called value chain activities; the
value chain activities of an industry are shown in Figure 7.2. So, a firm that adopts integration
may move forward or backward the industry value chain.
Figure 7.2: Industry Value Chain

Supply of raw materials Manufacturing Distribution and

and components and operations retail network

Expanding the firm’s range of activities backward into the sources of supply and/or forward
into the distribution channels is called “Vertical Integration”. Thus, if a manufacturer invests in
facilities to produce raw materials or component parts that it formerly purchased from outside
suppliers, it remains in the same industry, but its scope of operations extend to two stages of the
industry value chain. Similarly, if a manufacturer opens a chain of retail outlets to market its
products directly to consumers, it remains in the same industry, but its scope of operations
extend from manufacturing to retailing. Viewed from a broader angle, the firm’s own value
chain activities are often closely linked to the value chain activities of the suppliers and
distributors. Suppliers’ value chain is important because the costs, performance features and
quality of the inputs influence a firm’s own costs and product differentiation capabilities. Anything
the firm does to lower costs or improve quality of its inputs, will enhance its own competitiveness
in the market. Similarly, the costs and margins paid to distributors and retailers become a part
of the price the consumers pay. Besides, the activities of distributors and retailers affect consumers’
satisfaction.
Vertical integration can be:

1. Full integration: participating in all stages of the industry value chain.
2. Partial integration: participating in selected stages of the industry value chain.
A firm can pursue vertical integration by starting its own operations or by acquiring a company
already performing the activities it wants to bring in house. Thus, integration is basically of two
types:

1. Vertical integration and
2. Horizontal integration

Vertical Integration
As already explained above, vertical integration involves gaining ownership or increased control
over suppliers or distributors. Vertical integration is of two types:

1. Backward Integration: Backward integration involves gaining ownership or increased
control of a firm’s suppliers. For example, a manufacturer of finished products may take
over the business of a supplier who manufactures raw materials, component parts and
other inputs. Brooke Bond’s acquisition of tea plantations is an example of backward
integration.

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