Saint Louis College

City of San Fernando, La Union

COLLEGE OF COMMERCE, SECRETARIAL & ACCOUNTANCY

CBME 2 (Strategic Management)

INTEGRATION STRATEGIES

Integration in the strategic management process is a familiar matter for companies that are
owners of more than single business. Strategic integration combines the strategies of a
company's different business units to divide resources and give much return on investment
for the whole organization.

Vertical integration is the extent with which a business unit is incorporated with its suppliers
and buyers. Suppliers are usually called the upstream from the organization, while buyers are
called downstream. Vertical integration strategies are normally used when organizational
managers have pinpointed a necessity or want to extend into new industries. Say for instance,
the vertical integration strategies of a fast-food chain like Jollibee may incorporate the
acquisition of a cup factory or a bun factory to trim down the costs of those supplies. Vertical
integration enables companies to acquire a larger share of the total product value added and
to benefit from service activities like shipping and distribution that get higher returns than
production. Vertical integration includes forward integration. backward integration, and
horizontal integration as explained below.

Forward integration refers to acquiring ownership or bigger control over former distributors
or retailers through opening outlets on the main locations. One of the common techniques
today of more and more manufacturers using forward integration is through creating an
interactive website that would directly belt products to consumers.

Franchising is an effective and easy way of carrying out forward integration businesses using
franchising model could speedily expand since costs and opportunities are stretch among
numerous individuals. The market dominance of Jollibee could not have happened without
franchising. There are more than 1000 Jollibee stores worldwide. More than half of this
network is franchised.

Backward Integration. Both manufacturers and retailers buy required materials from
suppliers. Backward integration is a strategy of becoming an owner or increasing control of a
company's former suppliers. This strategy can be chiefly suitable once a company’s present
suppliers become undependable, too expensive, or cannot satisfy the company's needs. In a
wine business for instance, most wine producers also plant and process their own grapes and
even produce their own bottles.

In the Philippines, a good example of backward integration is when the Meralco Electric
Company owned by the Lopez family organized the Philippine Electric Company (Philec)
which has the business of manufacturing and servicing of power transformers.

Obviously, beyond the beer and the beverage businesses, San Miguel Corporation has
integrated backward by entering into the bottle manufacturing and other packaging materials
businesses.

It was almost 50 years ago when Dole Pineapple Philippines, a world leader in fresh and
packaged fruits and vegetables production chose the fertile land of Palomolok in the province
of South Cotabato with its undulating fields of more than 18,000 hectares to farm its delicious
pineapple and started integrating backward. Today, Dole is the world largest producer of
bananas and pineapples, with majority of its pineapple production facilities situated in
Palomolok.

Horizontal integration is a strategy of becoming an owner of or more control over a

company's former competitors. In strategic management it is usually a single-industry
strategy. This strategy often consists of the practice of acquisition and/or merging with other
business organizations in similar industry to attain organizational objectives. Here a company
may choose to purchase a rival obtain a larger share of the market. A lower cost structure,

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 Saint Louis College
City of San Fernando, La Union

COLLEGE OF COMMERCE, SECRETARIAL & ACCOUNTANCY

CBME 2 (Strategic Management)

less industry competition and more product differentiation are some of the benefits of
horizontal integration strategies

Today, the increased use of horizontal integration as a growth strategy is one of the most
important trends in strategic management. The use of horizontal integration may result to
economies of scale and improved transfer of resources and competencies. Efficiency is more
likely with mergers among direct competitors and not much with unrelated businesses.

From selling only a few staple fast-food items under the Jollibee brand in the fast-food
category, Jollibee Foods Corporation has acquired some formerly independent fast-food
brands in the Philippines such as Chow King, Greenwich, Red Ribbon and Mang Inasal which
are formerly its competitors. It also acquired Deli France, another rival in the industry, but
later divested this from its operations.

DIVERSIFICATION STRATEGIES

There are two common types of diversification strategies: related and unrelated.

Businesses are believed to be related when their value chains have competitively valuable
cross-business strategic fits. While businesses are believed to be unrelated when their value
chains are too different that no competitively valuable cross-business relationships are
present. The majority companies prefer related diversification strategies in order to take
advantage of synergies as follows:

1.Competitively valuable expertise, technological know-how, or other capabilities are

transferred from one company to another.

2. The related activities of separate businesses are combined into a single operation to attain
lower costs.

3. Common use of a well-known brand name is taken as an advantage.

4. In order to create competitively valuable resource strengths and capabilities there is cross-
business collaboration.

Diversification must do more than simply spread business risk across different industries,
however, because shareholders could accomplish this by simply purchasing equity in
different firms across different industries or by investing mutual funds. Diversification makes
sense only to the extent the adds more to shareholder value than what shareholders could
accomplish acting individually. Thus, the chosen industry for be attractive enough
consistently high returns on investment and offer potential across the operating divisions for
synergies greater than those entities could achieve alone.

Many strategists contend that firms should "stick to the knitting" and not stay too far from the
firms' basic areas of competence. However, diversification is sometimes an appropriate
strategy, especially when the company is competing an unattractive industry.

Related Diversification.
Related diversification is a strategic change in which the company moves its core industry into
other industries that are related to the core industry. The position taken here is that
relatedness has two dimensions:
1. one is the degree to which the new industry is related to the core industry
2. the other more important is the degree to which the company operates at the same center
of gravity in the new industry.

Related diversification is a strategic change in which the company diversifies be entering new
industry but always enters business in that industry at the same center of gravity. An

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 Saint Louis College
City of San Fernando, La Union

COLLEGE OF COMMERCE, SECRETARIAL & ACCOUNTANCY

CBME 2 (Strategic Management)

appreciation for the degree of relatedness is needed to estimate the amount of strategic
change that is being attempted. A scale of relatedness could he constructed by listing the
functional aspects of any business, such as process technology, product technology, product
development, purchasing, assembly. packing shipping, inventory management, quality,
labor relations, distribution, selling promotion, advertising, consumer / customer, buying
habits, working capital, and credit.

The strategy of Universal Robina Corporation (URC) could be characterized as related

diversification within the broad food sector. Early in the 1950s the company started to produce
cornstarch from corn. Later it launched its coffee products which are Presto Coffee and Blend
45. In the early 1960s it became notable with its Presto Ice Cream. Afterwards it made such
products as flour and snack products.

Unrelated Diversification
An unrelated diversification strategy favors capitalizing on a portfolio of businesses that are
capable of delivering excellent financial performance in their respective industries, rather
than striving to capitalize on value chain strategic fits among the businesses. Firms that
employ unrelated diversification continually search across different industries for companies
that can be acquired for a deal and yet have potential to provide a high return on investment.

Pursuing unrelated diversification entails being on the hunt to acquire companies whose
assets are undervalued or companies that are financially distressed or companies that have
high growth prospects but are short on investment capital. An obvious drawback of unrelated
diversification is that the parent firm must have an excellent top management team that plans,
organizes, motivates, delegates, and controls effectively. It is much more difficult to manage
businesses in many industries than in a single industry.

The most prominent diversification made by the Lopez Group of Companies during the Post
Martial Law which could be categorized as unrelated are ABSCBN, Sky Cable, Star Records
under the entertainment sector, Bayantel in the telecommunications area, Maynilad under
water distribution segment, the Rockwell Land Corporation of the real estate development
industry and the Manila North Tollways Corporation under the transport sector.

The prominent construction company DM Consunji Company (DMCI) which specialized in

commercial and high-rise buildings diversified into unrelated business when it bought the
ownership interest of an Austrian company to acquire the control and management of the
Semirara Coal Company (SCC). Semirara had been given the right to develop and extract the
sub-bituminous coal deposits in Semirara Island.

===============================================================

Course Facilitator:
Mark Anthony D. Latoja, PhD.

Reference:
Formulating and Implementing Policy and Strategy in Business (An Analytic Approach to
Concepts and Cases) by: Angelita Ong Camilar-Serrano
MindShapers Co., Inc. 2017

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