Page 123 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Unit 7: Corporate Level Strategies

Backward Integration increases the dependability of the supply and quality of raw materials Notes
used as production inputs. This strategy is generally adopted when:

(a) Present suppliers are unreliable, too costly or cannot meet the firm’s needs.
(b) The firm’s industry is growing rapidly.
(c) The number of suppliers is small, but the number of competitors is large.

(d) Stable prices are important to stabilize cost of raw materials.
(e) Present suppliers are getting high profit margins.
(f) The firm has both capital and human resources to manage the new business.

2. Forward Integration: Forward integration involves gaining ownership or increased
control over distributors or retailers. For example, textile firms like Reliance, Bombay
Dyeing, JK Mills (Raymond’s) etc. have resorted to forward integration by opening their
own showrooms.
Forward Integration is generally adopted when:

(a) The present distributors are expensive, or unreliable or incapable of meeting the
firm’s needs.
(b) The availability of quality distributors is limited.

(c) The firm’s industry is growing and will continue to grow.
(d) The advantages of stable production are high.
(e) Present distributors or retailers have high profit margins.

(f) The firm has both the capital and human resources needed to manage the new
business.
Advantages of Vertical Integration: The following are the advantages of vertical integration:

1. A secure supply of raw materials or distribution channels.
2. Control over raw materials and other inputs required for production or distribution
channels.

3. Access to new business opportunities and technologies.
4. Elimination of need to deal with a wide variety of suppliers and distributors.
Risks
1. Increased costs, expenses and capital requirements.

2. Loss of flexibility in investments.
3. Problems associated with unbalanced facilities or unfulfilled demand.
4. Additional administrative costs associated with managing a more complex set of activities.

!

Caution Sometimes, half-hearted commitment of wholesalers and retailers frustrate a
company’s attempt to boost sales and market share. In such an event, forward integration
is the best strategy.

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