MARKETING

CHANNELS
SEVENTH EDITION
Anne Coughlan | Erin Anderson
Louis Stern | Adel El-Ansary

Chapter 9
Vertical Integration in Distribution

配銷系統的垂直整合 1
 學習目標
 理解垂直整合為從製造到購買的從過程，而不只是二元選擇
 診斷為何通路成員（如製造商、批發商，或零售商）期望垂
直整合，但卻在數年間即予以放棄
 在通路或有一些流程確能改進長期投資利潤時，作出垂直整
合的決定
 解釋為何以外包做為起始點
 了解三個情況是如何改變起始點，以致垂直整合可控制配銷
系統中的外包
 定義並解釋六個公司能力的種類，並辨別其不同
 探究不確定的環境對向前整合所得利潤的影響
 確認垂直整合在學習和創造策略選擇權的角色

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 Vertical integration in distribution
 When the manufacturer integrates a distribut
ion function (making sales, fulfilling orders, o
ffering credit), the manufacturer’s employee
s do the work
and the mfgr. Has integrated forward or downstr
eam, from the point of production.
A downstream channel member, e.g. a distribut
or can produce its own branded source of produ
ct, thereby integrating backward.

3
 Make or buy ?
 In marketing channel, make-or-buy decision
(vertically integrate or outsource) are critical
strategic choices

4
 Make or buy ?
 The choice of make-or-buy is not really binar
y, make versus buy is a continuum that sho
ws how the costs, benefits, and responsibiliti
es of doing the work are split between two o
rganizations.

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The continuum of degree of vertical
integration
buy make
Quasi-vertical integration
Market contracting Vertical integration
（ relational governance ）
Third
Thirdparty
partydoes
doesitit How does the work get done?
How does the work get done? You
Youdo
doitit
（（for
foraaprice
price）
）

Their
Theirpeople
people your
yourpeople
people
their
theirmoney,
money, your
yourmoney,
money,
The
Thecosts
costs
Their
Theirrisk
risk your
yourrisk
risk
Their You and third
Theirresponsibility
responsibility party share costs
your
your responsibility
responsibility
and benefits

Their
Theiroperation
operation（ （control
control）
） your
your operation
operation（（control
control）
）
The
Thebenefits
benefits
their
theirgain
gainor
orloss
loss your
your gain
gainor
orloss
loss
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 The degree of vertical integration
 When outsourcing under classical market contract
s (the epitome of the buy mode), manufacturers an
d the downstream channel members ：
 Are interchangeable
 Deal with each other in a completely independent and i
mpersonal fashion (arm’s length contracting)
 Negotiate each transaction ad though it were the only o
ne
 Begin and end their transactions based solely on the me
rits of the current set of offerings

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 The degree of vertical integration
 Relational governance
Compromising between the make-buy extremes
by creating channels that have some properties
of both owned and independent channels
Quasi-vertical integration: franchising and close
relationship are channel strategies that simulate
vertical integration

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 The degree of vertical integration
 In principle, every distribution arrangement is
unique and can be placed somewhere along the
degree-of-vertical-integration continuum as a
function of the relationship’s operating methods
and the nature of the contract (if any) between the
parties.
 In practice, certain common institutional
arrangement tend to correspond to regions within
the continuum

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 The degree of vertical integration-
examples of institutions in channel
Classical
Quasi-vertical Vertical
function market
integration integration
contracting
「 captive 」 or Produce sales
Manufacturers’
Selling (only) exclusive sales force (direct
representatives
agency sales force)

Wholesale Independent Distribution joint Distribution arm

distribution wholesaler venture of producer

independent
Retail distribution Franchise store Company store
（ third party ）

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 The choice to make
 Choose the make option （ for vertical integratio
n）
 Assume all the accounting costs of distribution
 All personnel costs
 All the costs of all other channel flows
 Bears the risk of the distribution operations and is res
ponsible for all actions
 The fundamental reason to integrate forward is to con
trol the operation
 From the economic standpoint, control per se has no value w
hatsoever. Control is beneficial only if the firm can improve o
verall economic results
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 The choice to make
 Manufacturer integrate forward when they believe
it will increase their profits
 Merely appropriate the returns from the performance of
channel flow and add to the returns from production.
(profit is in maintenance rather than production )
 In practice, downstream and upstream activities
are very different and conform to different financial
models
 The fundamental difference drive firms to grow and
diversify into other business but often at the same level
of the value chain.

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 The choice to buy
 Focusing solely on production, manufacturer
will turn to the marketplace for distribution s
ervices. I will seek a third party, an outside o
rganization to perform channel flows in retur
n for a price.
第三方履約商 (fulfillment house)

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 The choice to buy
 Outsourcing shifts all the costs to the third party
 Accounting cost Including personnel, risk of failure and t
he responsibility for action
 The third party benefits by controlling the operatio
ns.
 This is of no benefit unless the third party use that
control to generate profit over and above the costs
of distribution （ both accounting and opportunity c
osts)

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 When to vertically integrate forward
 The organization’s goal is to maximize the fir
m’s overall ROI in the long run
 In deciding whether to integrate forward into
distribution or backwards to production, the
question are ：
Whether taking on this flow increase ROI ？
Does so more than other use of the resources n
eeded to provide the flow ？

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 When to vertically integrate forward
 return on investment (ROI) be the criterion
ROI is the ratio of results obtained （ roughly, o
perating performance: revenue minus direct cos
ts) to the resources used to obtain them (roughl
y, overhead, reflecting the amortization of fixed i
nvestment

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 When to vertically integrate forward
 Two circumstance prelude vertical
integration forward, even if it would add to
ROI.
The firms does not have and cannot obtain the
resources to integrate forward.
The firm has other priorities that contribute even
more to ROI and that exhausted the firm’s
capacities.

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 Outsourcing as the starting point
 Six reasons to outsource the performance
of a channel function to an outside party
motivation 動機
specialization 專業化
Survival of the economically fittest 經濟上適者
生存
Economies if scale 規模經濟
Heavier market coverage 更寬廣的市場範圍
Independent from any single mfgr. 獨立經營
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 Motivation 動機
 Outside parties have high-powered incentive
s to do their jobs well because they are inde
pendent companies accepting risk in return f
or the prospect of rewards.
Positive motivation （ profit ）
Negative motivation （ fear of loss, replaceabilit
y）

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 Specialization
 For wholesalers, distribution is all they do
-- they have no distraction The reverse is tru
e for manufacturer.
 Specialization engenders and deepens com
petence.

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 Survival of the economically fittest
 if specialists fail to do their functions better
than their competitors, they do not survive
 distribution in most sectors has low mobility
barriers,
this business is easy to enter and easy to exit.
An incompetent marketing channel member
cannot stay in business by subsidizing its
distribution losses with gains in other sectors,
such as production
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 Economies of scale
 Outside parties pool the demands of multiple mfgr.
for marketing channel flows. This allows them to a
chieve economies of scale by doing a great deal of
one thing (a set of distribution flows) for multiple p
arties.
 In turn, these economies of scale enable the outsi
der to perform flows that would otherwise be unec
onomical to do at all.
 By offering many brands in a product category, a d
istributor can do enough business to amortize the f
ixed costs of distribution facilities, logistics softwar
e, and the like.
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 Heavier coverage
 It stems from the independent’s ability to call on m
any customer, including small customers, and to c
all them often by creating a portofolio of products a
nd services
 By meeting multiple needs for that customers, the
rep can sell multiple brands and products in a singl
e call, converting a small prospect into a large pro
spect
 They create the selling synergy within the portfolio
of offerings.

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 Independence from a single mfgr.
 Many outside specialists are local entities
 They are stable entities with the same perso
nnel serving the same customer set year aft
er year.
 They have opportunities to know their custo
mers, forging strong customer loyalties.

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 Vertical integration forward when
competition is low
 Vertical integration always involves substanti
al set-up costs and overhead; therefore
It is only worth considering if a substantial amou
nt of business is potentially at stake
It is only worth considering if the firm is prosper
ous enough to be able to muster the necessary
resources—and does not have a better use of t
hem.

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 Vertical integration forward when
competition is low
 The greater the value of company-specific c
apabilities, the greater the economic rational
e for the manufacturer to vertically integrate
forward into distribution
idiosyncratic assets ( 特質性資產 )
In short, the prospect of accumulating compan
y-specific assets creates an economic rationale
to vertically integrate.

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 Six types of company-specific
capabilities in distribution
 Six types of company-specific capabilities in distrib
ution 配銷系統中六種公司獨特能力
 Idiosyncratic knowledge 專質性知識
 Relationships 關係
 Brand equity that derives from the channel partners acti
vities 從通路活動中衍生出的品牌權益
 Customized physical facilities 客製化的實體設備
 Dedicated capacity 專門的產能
 Site specificity 區位的特異性
 They have low value in any alternative outside use

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 Rarity vs. Specificity
- the effects of thin markets
 The key to asset specificity is that a
resource, tangible or intangible, not only
creates substantial value but that this asset
loses value if redeployed to a different
usage or user.

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 Rarity vs. Specificity
- the effects of thin markets
 Some capability is rare, but is not specific
 Another case of rarity results from industry c
onsolidation. Consolidation (the concentratio
n of market share in the hands of a few play
ers ） prunes markets so much that they be
comes thin.
 The effects is that suppliers cannot find rese
llers or agents, and downstream channel me
mbers cannot find suppliers.
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HOW ENVIRONMENTAL UNCERTAINTY IMPACTS VERTICAL
INTEGRATION

Highly Volatile Market

Low Specificity High Specificity

Outsource Distribution Highly Promising Less Promising

to Retain Flexibility Market Market
Until Uncertainty Is
Reduced

Vertically Integrate Do Not Enter

to Gain Control Over
Employees And Avoid
Small-Numbers Bargaining
In Changing Circumstances

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ROAD MAP TO THE VERTICAL INTEGRATION DECISION

Presume outsourcing is more attractive

GO than vertical integration
!

Start here

NO

Is potential business major or substantial?

Outsourcing
preferable
YES

Examine how function will develop

(Take both roads and see
Will where they go) Will
NO NO substantial
performance
company-
ambiguity
specific
be high?
investments
accrue?
Outsourcing remains
attractive
YES
YES

Volatile, uncertain environment

(accelerates effect of company-specific investments)
Consider overturning
outsource presumption:
Vertical Integration,
increasingly attractive

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 因應環境不確定性
高波動的市場

獨特性低 獨特性高

外包配銷系統以 有前景的市場 沒什麼前景的市場

維持彈性，直到
不確定性變得比
垂直整合以增加 不要進入
較小
對員工的控制，
在變動的環境中
避免小額交易
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垂直整合決策路徑

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