Understanding Vertical Integration and Internationalization
Vertical Integration
Vertical Integration is when a company gets involved in more parts of the production process. It either becomes its own supplier or its own distributor/customer.
Types of Vertical Integration:
- Backward (upstream) integration: This happens when a company starts making its own supplies or raw materials. For example, if a car manufacturer starts producing its own car parts.
- Forward (downstream) integration: This happens when a company starts controlling the distribution or selling of its products. For example, if the car manufacturer starts opening its own car dealerships.
Why it Happens:
The new business activities might be related to the company’s current operations, but they could also be somewhat different or unrelated. So, vertical integration can sometimes mix with related or unrelated diversification, depending on how the new activities are connected to the existing business.
The Multinational Firm
A company is considered multinational when it operates in two or more countries with the aim of maximizing their benefits under a global group perspective and not in each of their national units.
Reasons for Internationalization
External Reasons:
- Industry life cycle
- External demand
- Following-the-customer
- Competitive pressure
- Globalization of the industry
Internal Reasons:
- Reduction in costs
- Minimum efficient size
- Search of resources
Selecting the Target Country
- Growth forecast
- Political risk
- Economic risk
- Difficulties to operate in the local market
Entry Mode Strategies
Exporting
Exporting is the easiest and most common way for companies to sell in international markets.
How it Works:
The company makes the products in its home country and ships them to other countries. If needed, the products can be adapted to meet local market requirements.
Types of Exporting:
- Direct Exporting: The company sells products abroad using its own resources (e.g., hiring its own sales team or managing distribution directly).
- Indirect Exporting: The company uses intermediaries (independent agents or distributors) to handle sales in the foreign market.
Contractual Arrangements
This involves working with foreign companies without investing money directly in their country. Instead, the company transfers rights (e.g., to use its brand, technology, or know-how) under specific conditions, in exchange for financial compensation.
Direct Investment Abroad
This is when a company invests its own money in the target country to set up operations. This approach involves more risk and commitment but can offer greater control.
Two Key Questions:
- Shared or Not?
- Joint Venture: The company partners with another firm in the foreign country. Both share ownership and decision-making.
- How is the investment made?
- Acquisition (External Development): The company buys a local firm in the foreign market.
- Subsidiary (Internal Development): The company sets up its own business operations from scratch in the target country.
Strategy Implementation
To successfully implement a strategy, two things need to “fit” well:
- Strategic Fit: The strategy must match the situation or context it is being applied to (e.g., market conditions, competition, or customer needs).
- Organizational Fit: The strategy must align with how the company is organized (e.g., its structure, culture, and resources).
When both types of fit are strong, the company is more likely to succeed.
Organizational Support
What is Organizational Design?
- Split the work
- Distribute the work
- Coordinate the work
- Allocate resources
- Control
Activities of Strategic Planning
According to David (2013) strategic planning includes 4 fundamental elements:
- Annual goals
- Action plans
- Politics and procedures
- Resource allocation