Vertical Integration – Strategic Characteristics and Competitive Implications
Making strategic decisions are part of the territory when it comes to the job of an analyst. You’ll need to decide what to do in a given circumstance and then answer questions to explain your decisions. Let’s say you are a Strategic Analyst for a Fortune 500 Company, and your CEO has asked you how to position a specific business and product line to gain a competitive advantage in a single market.
Part A: Product Differentiation
Define product differentiation and discuss the role that customer perceptions play in product differentiation. Identify the three broad categories of product differentiation and two bases of differentiation under each category. Explain the relationship between product differentiation and managerial creativity
Part B: Flexibility and Real Options
What is strategic flexibility? Why is it thought of as a third generic business-level strategy? What are strategic options? What are the real options?
Part C: Collusion
What is collusion?
What are the two types of collusion and how are they different?
How does signaling relate to collusion?
Part D: Vertical Integration
Define vertical integration and differentiate between forward vertical integration and backward vertical integration. Identify the three fundamental explanations of how vertical integration can create value and discuss how value is created under each.
Identify three reasons a firm may be able to create value through vertical integration when most of its competitors are not able to create value through vertical integration.
Introduction
Every business intends to gain a competitive advantage through effective business strategies. In this contemporary business era, the firm has to depict the specific business and product line. The firm has to set the direction and execute different strategies to make the difference in the competitive market. Starbucks, a prominent coffee chain, has to set the direction through particular business and product line to get an advantage. The study revolved around product differentiation, flexibility, collusion, and vertical integration. Accordingly, the firm has to come up with some effective strategies.
Part A: Product Differentiation
Product differentiation is a process of making the product different from other substitutes in the competitive market. The product differentiation can be depicted through quality, packing, features, and design. Despite having substitutes in the market, customers usually prefer the particular product due to these differences. The product differentiation is a key product strategy companies like Starbucks can carry in the competitive market to get the advantage. Three different types of differentiation are vertical, horizontal and simple. For Instance, Starbucks Company streamlines different coffee product features, which cannot be imitated in the competitive market. It is a simple differentiation. The second type of differentiation is horizontal. The product may contain a single characteristic of the product, and customers usually are not clear about the quality. On the other hand, in the vertical type of differentiation, customers perceive the quality of the product positively. The business strategy of the Starbucks is the vertical differentiation
The product differentiation is triggered by managerial creativity. For Instance, in an organization, the management can shape the creative culture to let employees conduct creative work. However, managerial creativity is quite visible in the company due to creative ideas and innovative approaches when managing, organizing, controlling and monitoring the work. Creative managerial ideas help to come up with a product which is undone in the competitive market. Creative ideas of the management can help employees produce a differentiated product. Thus, product differentiation can be justified through managerial creativity. For Instance, managers in this company have streamlined different ingredients in the coffee product. The creative approach helped the manager to portray the difference in the market.
Part B: Flexibility and Real Options
The organization has to evolve with time in the external business environment. The management of the company can face many changes in the external business environment due to many factors. It is important for the company to respond to these changes. The ability of the organization to integrate with some new external business trends is called strategic flexibility. For Instance, Starbucks has the capability to integrate with modern market or customer trends. Strategically, the firm management uses its internal resources to align with the external business environment. The strategic flexibility can be justified through some changes, which are to be made to be relevant in the market. Starbucks has a competitive advantage due to its strategic flexibility. The firm has set the direction to make the change with the time in the coffee market. The firm is capable of altering strategies. It makes the company a coffee business leader in a competitive landscape (Ding & Mahbubani, 2013).
Strategic flexibility has become the third generic level business strategy. In the competitive landscape, the firm decides to make changes in the product line to meet the needs of customers. Developing a new product to meet the needs of customers and making it a brand is a key business strategy. It seems the strategic flexibility of the firm that streamlines the change (Harrigan, 2003).
For an organization, the strategic options are some creative, strategic alternative. Normally, the firm uses strategic options to integrate with the external business environment. It is imperative to depict what a company can do in the external business process. For Instance, if Starbuck faces stiffer competition in the coffee market, the strategic option of the company is to enhance the product development to come up with some different products. Also, if the firm is going to enter into the new market, acquiring another firm is also a key strategic option to share the culture, increase market share, and get a competitive advantage. The real option for the company is an opportunity or choice for the firm regarding the investment. The firm usually intends to enter into the new market or develop another division of the business. It seems the real option for the company (Cunha & Sarmento, 2014).
Part C: Collusion
The collision is a secret agreement between two organizations to reduce the visibility of the competitive impact. The firm in the competitive market may decide to contain the secret agreement to restrain other companies from gaining legal business benefits. It is a key business strategy by the company that can work on some ways to grow in the external business environment.
Formal collusion and price leadership are two prominent types of collusion. In the formal collusion, the company may decide to contain an agreement to stick to high prices. On the other hand, the price leadership enables competitive prices. Setting prices, according to market leader price is an example of this type.
Signaling is a term that indicates an organization or party which contains particular information. Interestingly, no one in the market has this information. Thus, it can be shared by companies and form collusion.
Part D: Vertical Integration
The vertical integration is a process of owning the supply chain process. The company owns the supply chain process and initiates the production process accordingly to meet the needs of clients (D’Aveni & Ravenscraft, 1994). The big difference between forward integration and backward integration is the control of the distribution and supply chain process. For Instance, in the forward integration, the company contains direct distribution. Starbucks is depicting the forward integration due to the direct supply of products to customers. On the other hand, the merger of suppliers is backward integration. If the company wants to improve the supply chain process, it can adopt backward integration. It is a good option for Starbuck companies because the efficiency of the supply chain process has become one of the main priorities (Ménard & Shirley, 2008).
The vertical integration can create value in many ways. The value through vertical integration is to be created in the following ways
Increasing Market Share
The vertical integration can help the company enhance the revenue streams, save the business cost and increase profitability. It can lead to an increase in the market share (Cunha & Sarmento, 2014).
Quality Assurance
Vertical integration is a good business strategy that can help the company inject quality assurance in the business process. The value can be created through quality because the high-quality final output is to be derived by the management (Mpoyi, 2003).
Business Stability
The vertical integration enhances business stability. When the firm owns the supply chain, it stabilizes both the supply chain and production process. It looks great value for the management of the company (Li & Tang, 2010).
Conclusion
In the end, it is to conclude that vertical integration is a key business strategy to increase market share, enhance business stability, and depict the quality assurance. The study emphasized product differentiation, collusion, strategic flexibility, and vertical integration. The example of Starbucks has been elaborated. The business and product line must be specified in the competitive market to get an edge over other rivals.
References
Cunha, M., & Sarmento, P. (2014). Does Vertical Integration Promote Downstream Incomplete Collusion? An Evaluation of Static and Dynamic Stability. Journal of Industry, Competition and Trade, 14, 1–38.
D’Aveni, R. A., & Ravenscraft, D. J. (1994). Economies of Integration versus Bureaucracy Costs: Does Vertical Integration Improve Performance? The Academy of Management Journal, 37(5), 1167-1206.
Ding, L., & Mahbubani, J. (2013). The two-stage decision model of vertical integration. Management Decision, 51(2), 306-320.
Harrigan, K. R. (2003). Vertical Integration, Outsourcing, and Corporate Strategy. Beard Books.
Li, H. L., & Tang, M. J. (2010). Vertical integration and innovative performance: The effects of external knowledge sourcing modes. Technovation, 30(2010), 401-410.
Ménard, C., & Shirley, M. M. (2008). Handbook of New Institutional Economics (2 ed.). Springer Science & Business Media.
Mpoyi, R. T. (2003). Vertical integration: Strategic characteristics and competitive implications. Academy of management journal, 13(1), 44-55.
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