5. Vertical integration
The degree to which a firm owns its
upstream suppliers and its down stream
buyers is referred as vertical integration
6.
7. Introduction
Companies are routinely counseled to
“stick to their knitting” and outsource every
thing else.
8. “stick to their knitting”
If a person or company sticks to their
knitting, they continue to do what they
have always done instead of trying to do
something they know very little about
He believes the key to a company's
success is to stick to its knitting rather
than trying to diversify or vertical integrate.
9. Academia has lost interest in VI.
The issue is largely regarded as settled in
favor of de-integration
VI shares the poor track record of
conventional diversification, and its
presumed deficiency is explained in
identical terms
10. Impact of the differing economic and
technological circumstances prevail in
the various segments of an industry’s
value chain, requiring distinct
management styles and cultures.
The problems of VI have been thrown
into sharp relief by the advent of
internet
11. VI and the Internet
Commonly IT technology
Information is easily exchanged across
companies boundaries
Transaction cost are reduced
Firm should become smaller
and less vertical integrated
12. According to Evans and Wurster of
blown to bits fame(2000)
Net is the primary driven behind the de-
integration of corporations.
it offers new possibilities commercializing
the information component of an industry
and, correspondingly, has the potential to
disrupt existing value chain.
13. “clicks and bricks”
Bricks and clicks is a business model by which a
company integrates both offline (bricks
) and online (clicks) presences,
A popular example of the bricks and
clicks model is when a chain of stores allows the
customer to order products either online or
physically in one of their stores, also allowing
them to either pick-up their order directly at a
local branch of the store or get it delivered to
their home.
14. VI is dominant foremost among
manufacturers that push downstream, it is
also prolific in services, as observed in the
converging media/ entertainment sector or
in more traditional industries such as
engineering and construction
15. VI strategies in today’s business
Environment
Current popularity of VI downstream
integration of customer interface, marks a
departure from traditional motivations
base on altering industry structure or
minimizing cost
VI is driven by learning related motives
16. Traditional rationales for VI
Creating barriers to entry
Avoiding exposure to the potential
opportunism of others
17. VI in the academic literature
Motives for firm’s VI strategies:
1. Strategic considerations, primarily to do
with power and positioning
2. Efficiency considerations, primarily
based on governance and transaction
cost arguments
19. Strategic considerations
Positioning via-a-via rivals and potential
rivals
Strategic approaches aim
to change the industry’s power structure,
either by building/exploiting the firm’s
market power or
by attempting to offset the power of others
20. VI prompted by considerations such as:
1. Foreclosing of input and output markets
to competitors
2. Cross subsidization of one stage of the
value chain by another in order to
squeeze out more focused competitors
3. Increasing barriers to entry
4. Retaining control over proprietary
knowledge
22. Efficient governance considerations
Governance arguments came to the fore
in the 1990’s.
Derived from two bodies of theory
1. Agency theory
2. Transaction cost economies
23. Both mainly seek to minimize the firm’s
exposure to opportunistic action on the
part of others
Each has a different focus, but both
share the premise that the firm
governance choice
Has a decisive impact on its cost
efficiency
Both seek to determine the firm’s most
efficient (cost minimizing) vertical
boundary
25. Transaction costs
Transaction costs are the greatest in
instances of “market failure” where a
particular transaction cannot be
adequately protected by contractual
means
26. VI provides the most economic solution
by minimizing technology related
transaction costs.
In agency theory, the problem of
opportunistic action in terms of
measurement problems, VI represents
the most efficient governance choice
27. Transaction and agency challenges
Through VI a firm can achieve these
challenges
Uncertainties in demand/price
Uncertainties in quality
Lack of coordination
Market failure in knowledge/technology
markets
Agency problems of measurement
uncertainty
28. Disadvantages of VI
Higher performance risk
Technological volitatility
Uncertain demand
In presence of high exit barriers it turned
to be costly
Loss of market incentives
Higher production cost
Loss of focus
29. Prominent contemporary motives for VI
Many of the VI motives identified and
studied by academics have become
obsolete or diminished in importance.
Instead, a number of a new compelling
motives for VI seem to have appeared that
have yet to b fully explored
30.
31. Value migration
In many industries, particularly in the
manufacturing sector, value added has migrated
downstream for a host of reasons:
High penetration rates and longer product life
spans, “the installed base”
As a result, a considerable portion of
value-added has shift away from
manufacturing towards maintaining
and servicing existing products
32. Example of computer
manufacturers
Most major computer manufacturers have
expanded aggressively into downstream
services specially consulting
IBM was the pioneer, but it was soon
emulated by the likes of Compaq
Compaq’s acquisition of digital in 1998
was motivated by CEO Pfeiffer’s ambition
to move the company into services and
consulting
36. Differentiation
Corporations strategy:
Corporations differentiate themselves on the
basis of product and services.
Previously differentiation was on the basis of
technical/functional merits of their offerings..
37. Added offerings :
1. Additional engineering support
2. Performance guarantees
3. Special distribution
4. Delivery arrangements
5. Packaging tailored to the Client's need
38.
39. A brand for a company is like a
reputation for a person. You earn
reputation by trying to do hard
things well.”
– Jeff Bezos
40. Total brand management
Close interaction with the final customer to
establish an emotional connection.
It creates good image of company in
customer mind.
Helps to read the customer psyche.
41. Customer demand integrated
solutions
Many companies are compelled by their
clients to offer an ever greater range of
products and services
Clients increasingly rely on their suppliers
to provide them with “integrated solutions”.
42. VI “push” in represents differentiation
while the integrated solutions motive
represents a VI “pull” by the customer
43.
44. OEM
Companies had to expand their activities into
product innovation and assembly to gain the
ability to provide their clients with advanced
subassemblies
OEMs are not the original manufacturers;
they are the customizers.
45. Clients increasingly charge engineering
contractors with holistic business
problem.
Engineering and construction
companies such as Bechtel and Fluor
Daniel have expanded their range of
activities to offer full project services
46.
47. What is synergy?
synergy means that teamwork will produce
an overall better result than if each person
within the group were working toward the
same goal individually.
48.
49. Synergies
One of the principal arguments against VI
is that combining fundamentally different
segments of the value chain within firm
reduces efficiency and raises bureaucratic
costs.
50.
51. Counterargument is that combining the
different stages offer more transaction
opportunities .
Close and ongoing relations between, say,
sales and manufacturing may lead to
significant synergies.
52. “Powerful synergies can also b realized by
suppliers that are allowed to penetrate
deep into their clients decision making
processes.”
53. “Make for stock” to “make to order”
By integrating forward into their
customers inventory planning they
typically obtain more timely information
about demand.
54. Firms that involve in Integration
Contractors & Engineers/Architects
“Design builders”
“Constructability
55. VI benefits
In-house operating expertise
Maximum operability
Minimizing total spending
Maximizing its return
56. Emerging Industries
VI is popular in mature industries but it is
often imperative for emerging industries
for two reasons:
1. Credibility
2. System compatability / technological
standard
57.
58. Credibility
Credibility = trust. Credibility = someone
worth the time.
A new industry may lack the credibility to
attract the suppliers and distributors.
59. Ford motor company
The emerging car industry by Henry
Ford's operation.
Company used to own the railways,
locomotives, power plants, ore-carrying
ships, blast furnaces and foundries
necessary to transform the inputs from the
firms iron ore and coal mines
60. The company initially was forced to own
and operate every stage of the industry
value chain because suppliers were
reluctant to share Henry ford’s bold
vision" horseless carriage”
So VI may be necessary to educate
customers and convince them of the
merits of the new products.
61. System Compatibility/Technology Standards
Emerging industries frequently rely on a
set of highly coordinated components,
which may be difficult to achieve among
independent parties
Coordination is required to lift performance
62. Attractive content was the key to getting
people to subscribe to the emerging
cable TV
“Time Warner” was able to enhance the
value proposition of its cable service
63. Services of “Time Warner” are:
Feature films would no longer appears last
on cable, but immediately after their
release in theater
Higher subscription revenue
Cable advertising allowed the firms to buy
more attractive contents
65. Assessment and implications
The majority of the firms moving
downstream and a casual survey of the
business press confirms that forward
integration is far more prevalent
Controlling down stream stages grown
importance over the years
Production paradigm has shifted from
push to pull in many industries
66. Move toward mass customization
New communication technologies have
allowed for un precedent direct contact
with customers, enabling the creation of
enduring relationships for manual benefit
67. Traditional VI motives are outdated
Significant numbers of traditional VI
motives have become obsolete or have at
least been severely weakened
Many governance arguments have been
cast aside by technological and other
innovations
Upstream VI benefits for superior
production and inventory scheduling
68. Spatial integration in place of ownership-
based VI
Attributed to technology have been
successfully migrated through the use of
technology brokers and consultants
Transaction cost motives for VI have been
weakened through the advent of the
internet
69. Barriers to entry have been eroded by
such events as converging industries and
abundant availability of global investment
capital
Liberalization of trade and investment
around the world attempt to foreclose
supply and distribution channels have
been shown to be futile in many industries
70. Why we need VI?
Downstream VI has remained popular in
many industries
For customer interface we use forward
integration
Upstream VI accessioned with
independent , closely aligned suppliers
71. Downstream VI based on learning motives
Recent VI decisions can best be explained
in terms of learning arguments
Most motives for contemporary VI are
value migration, differentiation, integrated
solutions, and synergy motives.
Downstream VI facilitates access to both
information and knowledge about
customers.
72. Such knowledge extends beyond insight
into what customers want today, how best
to provide them, and what future offerings
might look like.
Such knowledge can be generated only
through intimate learning relationships
with customers.
73. Upstream benefits
Upstream VI benefits can be replicated
with independent, closely aligned
suppliers, learning benefits can only be
realized fully by firms that own the
customer interface
Learning depends on the suspension, at
least temporarily, of the market logic,
which is the most easily accomplished
within the company
74. Importance of learning
The learning argument emphasizes the
need for more creative Entrepreneurship.
Entrepreneurial “alertness” through the
identification, acquisition, and adoption of
economically meaningful information and
knowledge is an essential component for
the company success
75. Challenges for VI
Challenges associated with VI are inside
put-able
Firms must find ways of retaining strong
market incentives and flexibility, where
they pursue a form of tapered VI
Make sure to keep their existing
buyers/suppliers on the side
76. Conclusion
Large scale empirical studies suggest that
VI has not been diminished by the
popularity of new organizational forms.
The anecdotal evidence presented that
vertically integrated firms compete
successfully in a wide range of industries
