Integration Strategies
Business organizations go for acquiring other business ventures to strengthen themselves in the competitive business environment. By acquiring other companies, they project more profits in the short run or the long run with greater stability in the marketplace. Acquiring organizations may be carried out by way of purchasing the shares of the other company and obtaining the controlling power of the company or by making offers for intervention in the management of the company.
Integration strategies that may be available to organizations are:
- Backward integration.
- Forward integration.
- Horizontal integration.
Backward Integration
The backward integration strategy looks into the matters of gaining control over the suppliers of the organization. A company pursuing such a strategy may build and commission plants and machinery to manufacture raw materials/sub-assembly/components that are required for their present business lines. Further, they may acquire equality (fully or partially) of the suppliers’ organization to obtain controlling power over the supplier.
If you look at the present-day business practices, many organizations do not pursue a backward integration strategy. Instead, they go for outsourcing. They look for the best deals from numerous suppliers, by way of negotiating. On the other hand, some organizations try to develop strong links with a few selected suppliers to fulfil their input requirements. When strong relationships are established with the suppliers the companies can help their suppliers develop their products. The firms may offer technical, managerial and financial assistance to develop the supplier. Such companies may try to maximize their profitability and stability through mutual benefits through cooperation. This way of behavior was common in Japanese industries and is common in most other companies today. As an example, a company which orders packaging material from a packaging material supplier may help to develop new packaging material in cooperation with their packaging material supplier.
Forward Integration
Forward integration refers to the strategies sought by companies to acquire or increase control over intermediaries between the company and its final customers (end-users of the company’s products) These intermediaries include distributors, agents, export houses, retailers etc. Sri Lankan examples include those tea estates extending their operations to exporting activities as well. This strategy enables the companies to gain more control over the intermediary levels to face market competition develop relationships with the customers and save on high margins that have to be paid to the intermediaries.
Horizontal Integration
When a firm carries out a strategy to increase or secure its market share by way of seeking more control over its competitors or even getting ownership, they are called horizontal integration strategies. A firm that follows a horizontal strategy may look for mergers, acquisitions, and takeovers of competitors to get the benefits as synergies, economies of scale and enhanced understanding of business knowledge, which ultimately will increase the efficiency and the stability of the firm.
Horizontal integration is common in most firms. Overseas examples include mergers of automobile manufacturers (Rolls Royce was bought by German car manufacturer Volkswagen). In the Sri Lankan context, you are familiar with Keels group’s purchases of Elephant House Foods division, manufacturer and marketer of Elephant House meat products