3.

Asses the potential for your company to increase profitability through vertical
integration. In reaching your assessment, algo consider the bureaucratic cost of
managing vertical integration.

"Vertical integration is a strategy whereby a company owns or controls its suppliers,

distributors, or retail locations to control its value or supply chain." (Kenton, 2020).
Vertical integration brings benefits to companies because it gives them the power to
control all processes to reduce costs and improve efficiency.

Backus has managed to be self-sufficient by following vertical integration, today this

company is the majority of its main distributors. In addition, as we mentioned above,
Backus is a monopolistic company that despite experiencing a time of pandemic
continues to increase its marketing channels.

According to Carrillo Mora, C., & Kocnim Chiock, G. (1994), within the entire beer
industry, vertical integration makes it more difficult for other monopolistic companies
to form that neutralize power. In addition, it increases the efficiency in the use of inputs,
that is, it avoids transaction costs as well as the risks of running out of stock. Lastly,
vertical integration broadens the client portfolio, at the same time increasing the degree
of internal competition in the markets within the beer industry. In words, Backus has a
few major comparisons to its competitors and vertical integration suits them because
greater share within the market is more efficiently utilizing economies of scale.

Finally, with this method, you will reinforce your mechanism, further reducing
transaction costs, avoiding the risk of shortages, and ensuring product quality, especially
at that time of Covid-19. Unfortunately, there are also threats because Backus is
vertically integrated, making it very difficult for them to leave the market because it has
packaging companies, transportation, distributors, and others focused and established
within the industry. Even so, this last point could encourage them to further expand
their empire within the country and not lose the position of the monopolistic company
in the country.

4. On the basis of your assessment in question 3, do you think your company

should (a) outsource some operations that are currently performed in-house or (b)
bring some operations in-house that are currently outsource?
Based on the evolution made in item 3 on the vertical integration of Backus, we
consider that Backus should continue to bring the operations that it performed by
subcontracting in order to reduce its operating costs, as well as efficiency in its
productive processes, costs and a flexible distribution channel. As it did with its
premium product, the Cusqueña beer, which in the year 2019 exceeded 8 million dollars
in exports being its main market Chile, in this case Backus took the decision to bring the
Cusqueña production to Chile in order to reduce the production costs, as well, Backus
announced the expansion of its plant in Chile for the treatment of affluent water, which
will allow it to reuse the water for other internal processes, all with the objective of
tripling its productive capacity and substituting its imports and being able to
manufacture almost all the brands it sells in that country, and also to be able to compete
with the Chilean market (Gestión, 2020).

Reference:

Carrillo Mora, C., & Kocnim Chiock, G. (1994). La industria cervecera peruana, 1986-
1990: una aplicación de la teoría de organización industrial. Apuntes. Revista De
Ciencias Sociales, (34), 51-63.
https://doi.org/https://doi.org/10.21678/apuntes.34.392

Gestión. (2020). Cerveza Cusqueña comenzó a producirse en Chile. Gestión. Recovered

from (2020, October 25). https://gestion.pe/economia/empresas/cerveza-
cusquena-comenzo-a-producirse-en-chile-ab-inbev-quilicura-noticia/?ref=gesr

Kenton, W. (2020, June 14). Vertical Integration. Investopedia.

https://www.investopedia.com/terms/v/verticalintegration.asp

R. (2011, June 18). UNION DE CERVECERIAS PERUANAS BACKUS Y JOHNSTON

S.A.A. Backus. http://raulorellana.blogspot.com/2011/06/union-de-cervecerias-
peruanas-backus-y.html