strategic-management

Integration Strategies
Forward integration, backward integration, and horizontal integration are sometimes collectively
referred to as vertical integration strategies. Vertical integration strategies allow a
firm to gain control over distributors, suppliers, and/or competitors.
Forward Integration
Forward integration involves gaining ownership or increased control over distributors or
retailers. Increasing numbers of manufacturers (suppliers) today are pursuing a forward integration
strategy by establishing Web sites to directly sell products to consumers. This strategy
is causing turmoil in some industries. For example, Microsoft is opening its own retail
stores, a forward integration strategy similar to rival Apple Inc., which currently has more
than 200 stores around the world. Microsoft wants to learn firsthand about what consumers
want and how they buy. CompUSA Inc. recently closed most of its retail stores, and neither
Hewlett-Packard nor IBM have retail stores. Some Microsoft shareholders are concerned that
the company’s plans to open stores will irk existing retail partners such as Best Buy.
Automobile dealers have for many years pursued forward integration, perhaps too
much. Ford has almost 4,000 dealers compared to Toyota, which has fewer than 2,000 U.S.
dealers. That means the average Toyota dealer sold, for example, 1,628 vehicles in 2007
compared to 236 vehicles for Ford dealers. GM, Ford, and Chrysler are all reducing their
number of dealers dramatically.
The Canadian company Research in Motion (RIM) opened its first online store for
BlackBerry applications in April 2009. RIM is looking to tap a market for software made
popular by Apple and its iPhone. BlackBerry users can download the new RIM storefront
from the main RIM Web site, but then they need to buy applications using PayPal.
An effective means of implementing forward integration is franchising.
Approximately 2,000 companies in about 50 different industries in the United States use
franchising to distribute their products or services. Businesses can expand rapidly by franchising
because costs and opportunities are spread among many individuals. Total sales by
franchises in the United States are annually about $1 trillion.
In today’s credit crunch reduced availability of financing, franchiser firms are more and
more breaking tradition and helping franchisees out with liquidity needs. For example,
RE/MAX International will finance 50 percent of its initial $25,000 franchise fee. Coverall
Cleaning Concepts lends up to $6,800 of its initial franchise fee. Persons interested in becoming
franchisees should go onto franchising blogs, such as Bleu MauMau, Franchise-Chat,
Franchise Pundit, Rush On Business, Unhappy Franchisee, and WikidFranchise.org. These
sites offer inside news, advice, and comments by people already owning franchise businesses.
However, a growing trend is for franchisees, who for example may operate 10 franchised
restaurants, stores, or whatever, to buy out their part of the business from their
franchiser (corporate owner). There is a growing rift between franchisees and franchisers
as the segment often outperforms the parent. For example, McDonald’s today owns less
than 23 percent of its 32,000 restaurants, down from 26 percent in 2006. Restaurant chains
are increasingly being pressured to own fewer of their locations. McDonald’s sold 1,600 of
its Latin America and Caribbean restaurants to Woods Staton, a former McDonald’s
executive. Companies such as McDonald’s are using proceeds from the sale of company
stores/restaurants to franchisees to buy back company stock, pay higher dividends, and
make other investments to benefit shareholders.
These six guidelines indicate when forward integration may be an especially effective
strategy: 5
• When an organization’s present distributors are especially expensive, or unreliable,
or incapable of meeting the firm’s distribution needs.
• When the availability of quality distributors is so limited as to offer a competitive
advantage to those firms that integrate forward.
• When an organization competes in an industry that is growing and is expected to
continue to grow markedly; this is a factor because forward integration reduces
an organization’s ability to diversify if its basic industry falters.
CHAPTER 5 • STRATEGIES IN ACTION 139