If the manufacturing company engages in sales or after-sales industries it pursues forward integration strategy. This strategy is implemented when the company wants to achieve higher economies of scale and larger market share. Forward integration strategy became very popular with increasing internet appearance. Many manufacturing companies have built their online stores and started selling their products directly to consumers, bypassing retailers. Forward integration strategy is effective when: Few quality distributors are available in the industry. Distributors or retailers have high profit margins. Distributors are very expensive, unreliable or unable to meet firm’s distribution needs. The industry is expected to grow significantly. There are benefits of stable production and distribution.
The company has enough resources and capabilities to manage the new business. When the same manufacturing company starts making intermediate goods for itself or takes over its previous suppliers, it pursues backward integration strategy. Firms implement backward integration strategy in order to secure stable input of resources and become more efficient. Backward integration strategy is most beneficial when: Firm’s current suppliers are unreliable, expensive or cannot supply the required inputs. There are only few small suppliers but many competitors in the industry. The industry is expanding rapidly.
The prices of inputs are unstable.
Suppliers earn high profit margins.
A company has necessary resources and capabilities to manage the new business. Advantages
Advantages of VI:
Lower costs due to eliminated market transaction costs
Improved quality of supplies
Critical resources can be acquired through VI
Improved coordination in supply chain
Greater market share
Secured distribution channels
Facilitates investment in specialized assets (site, physical-assets and
human-assets) New competencies
Disadvantages of VI:
Higher costs if the company is incapable to manage new activities efficiently The ownership of supply and distribution channels may lead to lower quality products and reduced efficiency because of the lack of competition Increased bureaucracy and higher investments leads to reduced flexibility Higher potential for legal repercussion due to size (An organization may become a monopoly) New competencies may clash with old ones and lead to competitive disadvantage Alternatives to VI
VI may not always be the best choice for an organization due to a lack of sufficient resources that are needed to venture into a new industry. Sometimes the alternatives to VI offer more benefits. The available choices differ in the amount of investments required and the integration level. For example, short-term contracts require little integration and much less investments than joint ventures.