The seventh case study for CMA (Final) Group 3 students-

Paper 15 - Business Strategy and Strategic Cost Management

CASE STUDY 7

Types of Strategic Integration

Identify the types of strategic integration in each of the following independent situations and state any two conditions when such an integration is not beneficial to a company.

(i) A soft drink manufacturing company "A" is facing stiff competition from another manufacturer. "A" buys bottle from a supplier. "A" wants to manufacture its own bottles and avoid a price mark-up on the bottles and thereby compete with lower cost of packaged drinks.

(ii) Company Comp makes laptops and it wants to acquire its competitor's laptop division "D" and sell under the one brand name "Comp".

 (iii) Agricult Company, which is currently engaged in efficient crop production with modern techniques, is planning to set up its own outlets to sell raw farm processed agricultural products.

Answer:

(i) Vertical backward integration:

 It is not beneficial when:  

a)   There are capacity building 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.

b)   Low efficiency lead to potentially higher costs resulting from lack of supplier competition.

c)        When previous upstream or downstream investment lead to decrease flexibility.

d)       Due to in-house development there is decreased ability for enhanced product variety.

e)      Development of new core competencies may compromise existing competencies.

(ii) Horizontal integration:

 It is not beneficial when:  

a)      The investment involved is huge.

b)      When the industry is saturated.

c)     There is inefficiency in the bought-out entity.

d) There is significant increase in overhead cost without corresponding revenue generation or increase in productivity.

(iii) Vertical forward integration:

 It is not beneficial when:
 a)      The company has to incur very high distribution costs.

 b)      There is likelihood of decrease in concentration of existing products.

 c)       The company will tend to become inefficient with regard to its existing strong operations.

 d)     There is considerable investment required.

                                                                                                Source: Suggested Answers - June 2014 by ICAI