What Is Vertical Integration

What is Vertical Integration
Vertical integration is a strategy where a firm acquires business operations within the same
production vertical. It can be forward or backward in nature. Vertical integration can help
companies reduce costs and improve efficiencies by decreasing transportation expenses and
reducing turnaround time, among other advantages. However, sometimes it is more effective
for a company to rely on the established expertise and economies of scale of other vendors
rather than trying to become vertically integrated.
BREAKING DOWN Vertical Integration
Specifically, vertical integration occurs when a company assumes control over several
production or distribution steps involved in the creation of its product or service in a
particular market vertical. Vertical integration can be carried out in two ways: backward
integration and forward integration. A company that expands backward on the production
path into manufacturing is assuming backward integration, while a company that expands
forward on the production path into distribution is conducting forward integration.
Concentric Diversification
A type of diversification in which a company acquires or develops new products or services

(closely related to its core business or technology) to enter one or more new markets.
Read more: http://www.businessdictionary.com/definition/concentric-diversification.html
Retrenchment is a term used to describe when a business decides to significantly cut or

scale-back its activities.
Retrenchment might occur when one or more of the following happen to a business:
 Reduce output & capacity

 Job losses / redundancy programmes
 Product / market withdrawal
 Disposal of business unit
 Scaling back planned capital investment
What Are the Causes of Retrenchment?
Retrenchment normally arises from decisions to change strategic direction, which in turn
usually happens because of one or more of the following:
 New leadership (usually a new CEO)

 Excessively-high costs and low profitability (or unsustainable losses)
 Low ROCE
 Excessively high gearing (leading to cash flow problems)
 Loss of market share
 A failed takeover or merger
 Economic downturn
 Change of ownership
Implications of Retrenchment for Change Management
A decision to adopt a strategy of retrenchment by definition involves change for a business.

Can this change be implemented successfully? Much depends on the circumstances, scale and
scope of the retrenchment.
 Small-scale, incremental retrenchment has only limited impact

 Significant retrenchment is often associated with a fundamental reappraisal of the
business – and therefore with complex and costly change management
Some of the key implications of retrenchment for change management are summarised in the
table below:
What is Industry Analysis?
Industry analysis is a market assessment tool used by businesses and analysts to understand
the competitive dynamics of an industry. It helps them get a sense of what is happening in an
industry, i.e., demand-supply statistics, degree of competition within the industry, state of
competition of the industry with other emerging industries, future prospects of the industry
taking into account technological changes, credit system within the industry, and the
influence of external factors on the industry.
Industry analysis, for an entrepreneur or a company, is a method that helps it to understand its
position relative to other participants in the industry. It helps them to identify both the
opportunities and threats coming their way and gives them a strong idea of the present and
future scenario of the industry. The key to surviving in this ever-changing business
environment is to understand the differences between yourself and your competitors in the
industry and using it to your full advantage.
Types of industry analysis
There are three commonly used and important methods of performing industry analysis. The
three methods are:
1. Competitive Forces Model (Porter’s 5 Forces)

2. Broad Factors Analysis (PEST Analysis)
3. SWOT Analysis
#1 Competitive Forces Model (Porter’s 5 Forces)
One of the most famous models ever developed for industry analysis, famously known as Porter’s 5
Forces, was introduced by Michael Porter in his 1980 book “Competitive Strategy: Techniques for
Analyzing Industries and Competitors.”
According to Porter, analysis of the five forces gives an accurate impression of the industry and
makes analysis easier. In our Corporate & Business Strategy course, we cover these five forces and
an additional force — power of complementary good/service providers.
Competitive Forces Model

The above image comes from a section of CFI’s Corporate & Business Strategy Course.
1. Intensity of industry rivalry
The number of participants in the industry and their respective market shares are a direct
representation of the competitiveness of the industry. These are directly affected by all the factors
mentioned above. Lack of differentiation in products tends to add to the intensity of competition.
High exit costs like high fixed assets, government restrictions, labor unions, etc. also make the
competitors fight the battle a little harder.
2. Threat of potential entrants
This indicates the ease with which new firms can enter the market of a particular industry. If it is
easy to enter an industry, companies face the constant risk of new competitors. If the entry is
difficult, whichever company enjoys little competitive advantage reaps the benefits for a longer
period. Also, under difficult entry circumstances, companies face a constant set of competitors.
3. Bargaining power of suppliers
This refers to the bargaining power of suppliers. If the industry relies on a small number of suppliers,
they enjoy a considerable amount of bargaining power. This can affect small businesses because it
directly influences the quality and the price of the final product.
4. Bargaining power of buyers
The complete opposite happens when the bargaining power lies with the customers. If
consumers/buyers enjoy market power, they are in a position to negotiate lower prices, better
quality or additional services and discounts. This is the case in an industry with more competitors but
a single buyer constituting a large share of the industry’s sales.
5. Threat of substitute goods/services
The industry is always competing with another industry in producing a similar substitute product.
Hence, all firms in an industry have potential competitors from other industries. This takes a toll on
their profitability because they are unable to charge exorbitant prices. Substitutes can take two
forms – products with the same function/quality but lesser price or products of the same price but
of better quality or providing more utility.
#2 Broad Factors Analysis (PEST Analysis)
Broad Factors Analysis, also commonly called the PEST Analysis stands for Political, Economic, Social
and Technological. PEST analysis is a useful framework for analyzing the external environment.
The GE matrix was developed by Mckinsey and Company consultancy group in the 1970s. The nine
cell grid measures business unit strength against industry attractiveness and this is the key
difference. Whereas BCG is limited to products, business units can be products, whole product lines,
a service or even a brand. You can plot these chosen units on the grid and this will help you to
determine which strategy to apply.

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What is Vertical Integration

BREAKING DOWN Vertical Integration

A type of diversification in which a company acquires or develops new products or services

Read more: http://www.businessdictionary.com/definition/concentric-diversification.html

Retrenchment is a term used to describe when a business decides to significantly cut or

 Reduce output & capacity

What Are the Causes of Retrenchment?

 New leadership (usually a new CEO)

Implications of Retrenchment for Change Management

A decision to adopt a strategy of retrenchment by definition involves change for a business.

 Small-scale, incremental retrenchment has only limited impact

Types of industry analysis

1. Competitive Forces Model (Porter’s 5 Forces)

#1 Competitive Forces Model (Porter’s 5 Forces)

Competitive Forces Model

1. Intensity of industry rivalry

2. Threat of potential entrants

3. Bargaining power of suppliers

4. Bargaining power of buyers

5. Threat of substitute goods/services

#2 Broad Factors Analysis (PEST Analysis)

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