A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it will result in improved efficiency and cost savings. For example, backward integration might cut transportation costs, improve profit margins and make the firm more competitive. There are other means to these ends: for example, derivatives can hedge changes in the price of supplies, while working closely with suppliers can deliver the other gains. “Seeking ownership or increased control of a firm’s suppliers”. EXAMPLES:
Starbucks is best known as a chain of coffee shops. As such, it has various suppliers and inputs — it buys coffee beans to make coffee as well as customized mugs and products to sell in its stores. It backward vertically integrated when it bought a coffee farm in China, because normally it would have to buy coffee beans from a coffee bean supplier. Backward Vertical Integration as Strategy for Starbucks
Starbucks chose to buy a coffee farm in China, an area that showed tremendous growth in the number of coffee drinkers. At the same time, there was increased competition among companies selling coffee, such as McDonald’s and other chains such as Costa Coffee. Adding so many new coffee drinkers to the market creates competition for high-quality beans, with every coffee shop needing to buy them. Competition for high-quality beans means that some competitors will not receive them at all and that those who do will pay a high price driven up by competition. By backward vertically integrating by buying a coffee farm, Starbucks ensures that it will have a bean supply and that it will receive it at a reasonable price. ADVANTAGES:
* Starbucks aims to work ethically with all of its suppliers. * Due to they do every process by their own so profits don’t have to be share with any other partner. * They have core competence in Coffee industry so it tough for other rival to compete with. * They can cut off some unnecessary working process and ordering good make Starbuck easier to proceed. * They have a course in training their staff to be qualified in making good coffee. * It easy for them to reserve their product quality and also easy to learn and keep in touch with customer need in order to improve and satisfy them. * From all of these make customer trust and loyal in their brand. DISADVANTAGES:
* In doing every process by their own make them lose economy of scale. The price of product will be higher than rivals. * When the company is run out of raw materials, this will effect to the customer because the finished product form the process is not enough to satisfy the customer need. They should have deal with the other raw material source to solve this breaking out.
McDonald’s is the world largest chain of fast food restaurants with more than 30000 local restaurant serving 52 million customers in more than 100 countries each day. McDonald’s primarily sells hamburgers, cheeseburgers, chicken products, french-fries, breakfast items, soft drinks, milkshakes and desserts. More recently, it has begun to offer salads, wraps and fruit. Each McDonald’s restaurant is operated by franchise, an affiliate, or the corporation itself. The corporation revenues come from the rent, royalties and fees paid by the franchisees, as well as sales in company-operated restaurants. McDonald’s revenues grew 27% over the three years ending in 2007 to $22.8 billion, and 9% growth in operating income to $ 3.9 billion.
McDonalds has practiced a backward vertical integration. It includes:
* Local sourcing of ingredients
* Cold chain
* Suppliers, McDonald’s purchases raw vegetables and other raw materials from its fixed, pre- defined suppliers only, therefore by increasing capital and labor, their production will increase proportionately. ADVANTAGES:
* From a supplier’s point of view, more lines meant a reduction in capacity utilisation and high cost of production. * To reduce cost,
* Improve supply chain coordination.
* Provide more opportunities to differentiate by means of increased
control over inputs. * To ensure that its products are of top quality
* Lead to expansion of core competencies
* Capacity balancing issues. For example, the firm may need to build excess upstream capacity to ensure that its downstream operations have sufficient supply under all demand conditions. Forward Integration
Forward integration is one of three types of vertical integration, which is a form of management control that involves companies in the same supply chain belonging to one owner. Forward, or downstream, vertical integration occurs when the company joins with or creates businesses whose role in the production of its goods occurs after its own; the products move forward after the company has finished its share of the manufacture. This commonly includes the distribution, sale or transportation of the goods. In many cases, forward integration is actually a form of diversification from the company’s usual business. This is commonly referred to as “eliminating the middle man,” as manufacturers may cut out the wholesaler to sell directly to retailers or the retailer to sell directly to customers. EXAMPLES:
American Apparel is a fashion retailer and manufacturer and is the classic example of a company that employs forward integration through controlling every aspect of distribution of its products. The original founder Dov Charney has remained the majority shareholder and CEO. The brand is based in downtown Los Angeles, where from a single building they control: the dyeing, finishing, designing, sewing, cutting, marketing and distribution of the company’s product. AA manages every form of distribution in-house, including: the high rent, high-profile retail stores, its wholesale operation selling clothing to screen printers and boutiques and the online store that sells throughout the United States and internationally. Warehousing and distribution is also managed internally from the company’s Los Angeles factory.
* The company shoots and distributes its own advertisements, often using its own employees as subjects. * It also owns and operates each of its retail locations as opposed to franchising. * According to the management, the vertically integrated model allows the company to design, cut, distribute and sell an item globally in the span of a week. * In addition to its retail stores and wholesale operations, American Apparel operates an online retail e-commerce website at http://store.americanapparel.net. * AA’s shipping and retail departments handle the distribution of these products that they sell themselves in more than 280 stores. * Inventory counts that used to take 6-8 people 6-8 hours to accomplish now take two people 2.5 hours to accomplish with better accuracy. The challenges that led to backward integration are:
* improve business processes and
* reduce lost sales attributable to out-of-stocks
* Potentially higher costs due to low efficiencies resulting from lack of supplier competition. * Decreased ability to increase product variety if significant in-house development is required. * Developing new core competencies may compromise existing competencies.
Kian Joo Canpack
Kian Joo Canpack Sdn Bhd (KJCP), is an independent out-source contract packer of fast moving consumer goods (FMCG) and a subsidiary of Kian Joo Can Factory Berhad (KJCF), the biggest packaging company in the ASEAN region. In addition to 2-piece aluminium cans, KJCF also offers a wide and complete range of products from steel cans to die cut packaging. KJCF, through Kian Joo Canpack Sdn Bhd (KJCP) and KJM Aluminium Can Sdn. Bhd. provides independent contract manufacturing services. KJCP represents a forward integration of another important activity within the supply chain process for FMCG products. Due to the synergistic network benefits of being part of KJCF, KJCP is able to: * Draw cans and other packaging from other KJCF plants.
* Operate as a solution provider for FMCG companies who prefer to out-source such activities while concentrating on brand management
* Improve supply chain coordination.
* Provide more opportunities to differentiate by means of increased control over inputs.
* Capture upstream or downstream profit margins.
* Increase entry barriers to potential competitors.
* Have less economies of scale.
* More monopoly power which could lead to higher prices for consumers. Joint Venture
Joint Venture is a legal entity in the nature of a partnership engaged in the joint prosecution of a particular transaction for mutual profit. Joint ventures are also widely used by companies to gain entrance into foreign markets. Foreign companies form joint ventures with domestic companies already present in markets. EXAMPLES:
Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. The stated reason for this venture is to combine Sony’s consumer electronics expertise with Ericsson’s technological leadership in the communications sector. Both companies have stopped making their own mobile phones.
* Provide companies with the opportunity to gain new capacity and expertise. * access to greater resources, including specialized staff and technology * sharing of risks with a venture partner
* The objectives of the venture are not 100 per cent clear and communicated to everyone involved. * Different cultures and management styles result in poor integration and co-operation. * There is an imbalance in levels of expertise, investment or assets brought into the venture * The partners don’t provide enough leadership and support in the early stages.
Verizon and Vodafone’s JV Endeavors
Verizon Communications was a leading deliverer of broadband and other wireless communications products. In 2000, they wanted to jump into the mobile wireless network provider industry and found a partner with European wireless behemoth, Vodafone.
Vodafone was the world’s leading international mobile communications group, providing wireless service to hundreds of millions of customers. They were able to tap into the North American market with a strategic joint venture with Verizon Communications. By combining Verizon’s cellular, PCS, and paging assets with Vodafone’s wireless communications technology and marketing, they have now become the nation’s most reliable and largest wireless network.
* increase productivity,
* generate greater profits
* sharing of risks and costs with a partner
* access to greater resources, including specialised staff, technology and finance DISADVANTAGES
* The objectives of the venture are not totally clear and communicated to everyone involved. * different cultures and management styles result in poor integration and co-operation * the partners don’t provide sufficient leadership and support in the early stages * Does not give the management of the company complete control because the decisions are taken by both the companies and therefore it can create problems if both companies do not agree on some issues. Mergers
EIB, Dubai Bank merger on cards
Emirates Islamic Bank, or EIB, and Dubai Bank are expected to merge this month that will create one of the leading Shariah-compliant banking units in the UAE. The expected merger will create fourth top Islamic bank in the country after Dubai Islamic Bank, Abu Dhabi Islamic Bank and Al Hilal Bank. Emirates NBD, which acquired Dubai Bank in last October, is looking for approval from authorities concerned in the UAE for the landmark merger because here is no point to run two parallel Islamic banks by one institution in the country. ADVANTAGES
* The merger will also reduce the cost of running business * the bank will save around Dh350 million in licensing expenses * Emirates Islamic Bank and Dubai Bank provide their customers with a comprehensive range of Shariah-compliant products and services that cater to the needs of their: * retail,
* corporate and investment banking clients, including transaction and deposit accounts, personal finance, trade finance, corporate finance and capital market. * A merger allows the acquirer to avoid many of the costly and time-consuming aspects of asset purchases. DISADVANTAGES
* Diseconomies of scale if business becomes too large, which leads to higher unit costs. * May need to make some workers redundant, especially at management levels – this may have an effect on motivation. Nestlé
Nestlé is a public limited multinational with head quarters in Vaud, Switzerland. Nestlé was founded in 1905 from a merger between Anglo-Swiss Milk Company and Farine Lactée Henri Nestlé Company. It specializes in the production of baby foods, bottled water, dairy products, breakfast cereals, ice cream, nutrition, beverages, chocolate and confectionery as well as a diverse array of prepared foods and miscellaneous pet care products. Nestle is the world’s largest food company and the world’s largest producer of dairy products. he new firm would be run by two registered offices, one in Vevey and one in Cham. With Emile-Louis Roussy as chairman, the company now included seven factories in Switzerland, six in Great Britain, three in Norway, and one each in the United States, Germany, and Spain. ADVANTAGES
* Ivestment of surplus cash .
* Enhancement of market share .
* Reduction of competition .
* Growth with the amalgamation of the competitive advantage of both the firms .
* Investment of surplus cash .
* Culture crash
* Dis-economies of Scale
* failure to adequately and formally develop the relationship,
* inadequate or misaligned valuations,
* Higher prices leading to allocative inefficiency
* The new firm can pay lower prices to suppliers.