Part 3: Channel Implementation Chapter 9: Vertical Integration in Distribution

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Part 3 Channel Implementation Chapter 9
Vertical Integration in Distribution

• MKTG 406 Pimentel

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Vertical Integration Defined

• A channel member assumes responsibility for
  additional channel flows rather than have them
  performed by other channel members
• Acquire other channel members
• Make or buy
• Forward integration
• Backward integration
• Flow by flow
• Not a binary decision of fully integrating or
  fully outsourcing

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Deciding When To Integrate Forward

• Preliminary decision outsource, do not integrate
• Then challenge preliminary decision
• Criterion long-run ROI
• Compare ROI for integrating versus outsourcing
• Revenues Direct Costs Net Effectiveness
• Overhead
  Overhead
• Efficiency
• Compare ROI for integrating with ROI for other
  possible investments
• Integrating as a business opportunity
• Control has no economic value

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Six Reasons To Outsource

• Motivation
• Specialization
• Survival of the economically fittest
• Economies of scale
• Heavier market coverage
• Independence from a single manufacturer

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Reasons To Integrate Forward

• Market is not competitive so channel is not
  efficient
• Small-numbers bargaining

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Reasons To Integrate Forward

• Idiosyncrasies
• Unable to get idiosyncratic needs filled
• Opportunism
• Specificity versus rarity

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Reasons To Integrate Forward

• Brand equity derives from downstream channel
  members activities

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Reasons To Integrate Forward

• Volatile market that requires high specificity
  yet is highly promising

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Reasons To Integrate Forward

• Performance ambiguity that substantially affects
  results

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Deciding When To Integrate Backward
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Deciding When To Integrate Forward
Backward

• Preliminary decision outsource, do not integrate
• Then challenge preliminary decision
• Criterion long-run ROI
• Compare ROI for integrating versus outsourcing
• Revenues Direct Costs Net Effectiveness
• Overhead
  Overhead
• Efficiency
• Compare ROI for integrating with ROI for other
  possible investments
• Integrating as a business opportunity
• Control has no economic value

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Six Reasons To Outsource

• Motivation
• Specialization
• Survival of the economically fittest
• Economies of scale
• Heavier market coverage
• Independence from a single manufacturer

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Reasons To Integrate Forward
Backward

• Market is not competitive so channel is not
  efficient
• Small-numbers bargaining
• Idiosyncrasies
• Unable to get idiosyncratic needs filled
• Opportunism
• Specificity versus rarity
• Brand equity derives from downstream channel
  members activities
• Volatile market that requires high specificity
  yet is highly promising
• Performance ambiguity that substantially affects
  results

upstream
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Integration Strategies

• Acquisition strategy
• Greenfield strategy

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Switching Costs

• Administrative costs
• Facilities costs
• Opportunity costs
• Psychological costs

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Key Terms

• Vertical integration
• Outsourcing
• Forward integration
• Backward integration
• Small-numbers bargaining
• Opportunism
• Performance ambiguity
• Acquisition strategy
• Greenfield strategy
• Switching costs