Lecture 3

Integration Strategies
Vertical Integration
Backward Integration
Forward Integration
Horizontal
Integration
Vertical Integration
The competitive & operating scope- within the same basic industry.

Expanding firms ranges of activities




Full integration/partial integration

Can be pursued best by:
1. Starting own operation or
2. Acquiring a company performing the activity



Backward into sources of
supply
Forwards towards end users
Vertical Integration

Strategic Advantages-

To strengthen the firms competitive position.
It works well if:
1. Produces sufficient cost savings to justify the extra investment
2. Offer technological & competitive strengths.
3. helps in differentiating the companys product offering.

Backward Integration
Backward Integration
Cost savings if economies of scale
1. is matched with that of the supplier or
2. Exceeded with no drop-off in quality & new product development
capability.
e.g. CISCO, Intel acquire companies that will help them to speed the advance
of Internet Technology & pave the way for next generation families
Can produce differentiation based competitive advantage with better
quality product.
helps to build core competency, add features that deliver greater
customer value.


Forward Integration

better access to end users and better market visibility.
Wholesaling & retailing
Internet lower the distribution cost, cost advantage over rivals and results in
lower selling prices to end users.




Disadvantages of
Vertical Integration

Increase in CAPEX
Outsourcing?
Capacity matching?
Skill sets for cost competitiveness.




Horizontal integration
Horizontal integration is a strategy where a firm creates or acquires
production units for outputs which are alike - either complementary or
competitive.

1. One example would be when a company acquires competitors in the same
industry doing the same stage of production for the creation of a
monopoly. E.g.
2. The management of a group of products which are alike, yet at different
price points, complexities, and qualities. This strategy may reduce
competition and increase SoM by using SCALE. E.G a car manufacturer
acquiring its competitor who does exactly the same thing.
VIP & Aristo
Face book & WhatsApp

WhatsApp has more than 450 million monthly average users, 70% of
which are active on a given day.
WhatsApp now handles more than 19 billion messages per day, a figure
that is approaching the text message (SMS) volume of the worldwide
telecom industry, which is a US$100-billion market.
WhatsApp uses internet connectivity rather than a phone network to offer
low-cost messaging, costs just $1 (after the first free year) and the
company has spent nothing on user acquisition to date.
WhatsApp can Facebook strengthen its footprint in international markets
and with teens.

Benefits of horizontal integration
Economies of scale
Economies of scope
Strong presence in the
reference market.
Monopoly pricing
For example, within a conglomerate, the content used in broadcasting
television would be used in broadcasting radio as well, or the content
used in hard copy of the newspaper would also be used in online
newspaper website.
Single business company: all of the firms eggs in one industry basket.

Digital cameras vs. film processing, CD/DVD- cassette tapes, mobile
phones vs. landline businesses.

Factors That Signify It Is Time To Diversify

Complementary technology
Leverage existing competency
Scope to reduce cost
B rand equity can be leveraged.

Diversification Strategies
Single business company: all of the firms eggs in one industry basket.

Digital cameras vs. film processing, CD/DVD- cassette tapes, mobile
phones vs. landline businesses.

Factors That Signify It Is Time To Diversify

Complementary technology
Leverage existing competency
Scope to reduce cost
B rand equity can be leveraged.

Diversification Strategies
Diversification Strategies
Building
Shareholders
Value
The Industry
Attractiveness
Test
The Cost-of-
entry Test
The
Better-off
Test
Diversification Strategies
Diversific
ation
Strategy
Option
Related
Business
Unrelated
Businesses
Related &
Unrelated
Businesses
Diversification Strategies
Related
diversification
Sharing of
matching value
chain
Strategic
business fit
Transfer of
expertise &
technology
Leverage brand
equity
e.g. J&J,
PepsiCo
unrelated
diversification
Any industry with
good profit
opportunities
Chosen sector-
sunrise
Can be executed
by acquiring a
company
Related &
unrelated
Core & non core
businesses
e.g. TATA group
Advantages:
Diversification Strategies
Substantial cost savings
Strategic alignment

Related diversification
Scattered risk
Overall group profitability
unrelated diversification
Entry strategies for diversification
Asian Paints to
Buy Ess Ess
Bathroom's
Front-End Sales
Business (UR)
M&A
Tata Motors
Finance
Internal Start Up
Or Greenfield
Ventures
JV- Maruti
Suzuki
Strategic
Alliance-
JV & Strategic
Alliance
Offensive & Defensive Strategies
Offensive Strategies
Initiatives To Match Or Exceed
Competitors Strength
Initiatives To Capitalize On
Competitors Weakness
Simultaneous Initiatives On Many
Fronts
End-run Offensives
Guerilla Offensives
Preemptive Strikes
Defensive Strategies
Position Defense
Counter Attack
Mobile Defense
Strategic Retreat
Fortification Strategy

E.G. Samsung India
Lecture 4
20
The Nature of Managerial
Decision Making
Decision Making
The process by which managers respond to
opportunities and threats that confront them by
analyzing options and making determinations
about
specific organizational
goals and courses of
action.
The Nature of Managerial
Decision Making
Decisions in response to opportunities
occurs when managers respond to ways to improve
organizational performance to benefit customers,
employees, and other stakeholder groups
Decisions in response to threats
events inside or outside the organization are adversely
affecting organizational performance

Decision Making
Programmed decisions Non-programmed decisions
Repetitive and routine Novel and unstructured
Rules, routines, SOPs can be
developed in advance
NO Rules, routines, SOPs can be
developed in advance. Based on
intuition, creativity, and judgment

Formalized procedures to select
appropriate solutions
Solutions must be worked out as
problem arise
Increases the efficiency and reduces
the cost
Change and adapt to environment
and generate new ways of behaving.
Decision Making
Intuition
feelings, beliefs, and hunches that come readily to
mind, require little effort and information gathering
and result in on-the-spot decisions
Decision Making
Reasoned judgment
decisions that take time and effort to make and
result from careful information gathering,
generation of alternatives, and evaluation of
alternatives

Models Of Organizational Decision
Making
The Rational
Model
The Carnegie
Model
The
Incrementalist
Model
The
Unstructured
Model
The Garbage
Can Model
The Rational Model
Stage 1:
identify and
define the
problem
Stage 2: generate
alternative
solutions to the
problem
Stage 3: select
solution and
implement it
Analyze specific
environment
Recognize the threats
and
opportunities

Resources to respond
to threats and
opportunities

Compare likely
consequences of
each alternative

assumption: ideal state
The Rational Model
Information
&
uncertainty
Managerial
abilities
Preference&
values
Access to information
Collection of data-
unknown environment
expensive,
information cost
e.g. fast food company

Intellectual
capabilities of
managers- limited
ability, time
constraint-
managerial cost


Unrealistic
Agreement
Assumption

The Carnegie Model
Rational model Carnegie model
Information is available Limited information
Decision making is costless Costly (managerial and information
cost)
Decision making is value free Is affected by the preferences and
values of decision maker
All possible alternatives are generated Limited range of alternatives are
generated
Solution is chosen by unanimous
agreement
--- by compromise, bargaining and
accommodation between
organizational coalition
Solution chosen is best for
organization
--------- is satisfactory for the
organization.
The Carnegie Model
Satisficing
Bounded
rationality
Organizational
coalition
Decide on certain
criteria which will be
used to evaluate
possible acceptable
solution
That limits set of
possible alternatives
Much less costly
search

Managers have a
limited capacity to
process information
Use of technology
Subjective decision
making


compromise,
bargaining,
negotiations.
and accommodation
Decision making: in the
midst of uncertainty/ rational
The Incrementalist Model
Works best in stable environment, In this model,
1. Managers select alternative courses of action that are only
slightly, or incrementally, different from those used in the
past.
2. Thus lessen the chances of a mistake muddling thorough
3. Decisions are rarely different that those made in past.
4. Avoid mistake, and suggest new course of action.

Managers move cautiously one step at a time, to limit
their chances of being wrong.

The Unstructured Model
H. mintzberg
Works when uncertainty is high.
Emphasizes the unstructured nature of
incremental decision making.
non- programmed decisions.
Revisit alternatives, rethink and constantly
adjusts to find new ways to take best
decisions.
The Garbage Can Model
Extreme unstructured nature
Decision making from both the sides: solution side & problem
side.

Analyse skill
sets and
resources
How to
lower
productio
n cost of
furniture?
Create
problems
How to
manage
internationa
l expansion?
Decision
making
garbage
can
Mix of all
problems,
solutions
Six Steps in Decision Making
Decision Making Steps
Step 1. Recognize Need for a Decision
Sparked by an event such as environment changes.
Managers must first realize that a decision must be
made.
Step 2. Generate Alternatives
Managers must develop feasible alternative courses of
action.
If good alternatives are missed, the resulting decision
is poor.
It is hard to develop creative alternatives, so managers
need to look for new ideas.
Decision Making Steps
Step 3. Evaluate Alternatives
What are the advantages and disadvantages of
each alternative?
Managers should specify criteria, then evaluate.
Decision Making Steps
Criteria

Legality Is the alternative legal and will not violate any
domestic and international laws or
government regulations?
Ethicalness

Is the alternative ethical and will not bring
harm stakeholders unnecessarily?
Economic Feasibility Can organizations performance goals sustain
this alternative?
Practicality

Does the management have the capabilities
and resources required to implement the
alternative?

Step 3. Evaluate alternatives
Decision Making Steps
Step 4. Choose Among Alternatives
Rank the various alternatives and make a decision
Managers must be sure all the information
available is brought to bear on the problem or
issue at hand

Decision Making Steps
Step 5. Implement Chosen Alternative
Managers must now carry out the alternative.
Often a decision is made and not implemented.
Step 6. Learn From Feedback
Managers should consider what went right and wrong
with the decision and learn for the future.
Without feedback, managers do not learn from
experience and will repeat the same mistake over.
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