Businesses, being uncertain, need solutions that can help them navigate rough tides. This calls for answers that involve integration strategy meaning and help business houses streamline their existing manufacturing processes. One strategy that helps here is a strategic integration growth strategy.
What Is Strategic Integration Growth Strategy?
Once you know the integration strategy meaning, you’ll see that it works on various levels within an organization. These models lead different business units of the same organization to share resources so as to leverage the maximum return on investment.
The goal of strategic integration is to align day-to-day activities of the organization with its mission statement.
Further, the strategy provides business owners with certain models that enable key stakeholders to devise plans and take actions accordingly.
However, problems arise when multiple business houses of the same parent organization employ the same types of integration strategy. This causes organizations to experience pitfalls in the process.
Strategic Management Process
The strategic management process begins with framing a mission statement. The mission statement helps key stakeholders attain different perspectives and evaluate the reason for the organization’s existence.
Next, business houses develop objectives and strategies that accelerate their growth and help them achieve their mission. They do this through programs, procedures and policies.
These seemingly easy steps become hard to implement in real life. Further, the complexity compounds when dealing with different businesses from the same organization that compete with one another.
Types Of Strategic Integration
Strategic integration frameworks could be broadly categorized into two major divisions. These are:
- Vertical Integration Strategy
- Horizontal Integration Strategy
Let’s review these in depth.
Vertical Integration Strategy
Vertical integration strategy meaning usually refers to how a business house is associated with its buyers and suppliers in the supply chain. The suppliers are referred to as ‘upstream’, while the buyers are called ‘downstream’. Organizations seek vertical integration strategies when they need to acquire entities in the supply chain. This could be both suppliers as well as buyers.
For instance, a fast food retail chain acquires a bun or a cup factory to reduce dependencies and cut costs. This acts as a major example of vertical integration strategy.
Types Of Vertical Integration Growth Strategy
Vertical integration strategy can be narrowed down to three principal components. These are:
- Forward Integration: In forward integration, an organization buys the retailers or distributes directly to the end-user
- Backward Integration: When an organization buys the supplier, it is called backward integration. For instance, when a supermarket buys a farm
- Balanced Integration: In a balanced integration growth strategy, an organization buys from both ends and gets complete ownership of the supply chain
Before you go ahead with a strategy, you must know when to implement it.
Vertical integration is attractive under numerous instances. Some are as follows:
- Suppliers and distributors exercise greater control in the supply chain, and the business has the resources to employ integration strategy example through either one or both of them
- The profit margin of suppliers and distributors is quite high
- The cost of raw materials is volatile and inconsistent
- Suppliers and distributors project unprofessional attitudes, leading to a loss in business
These points will help you decide how and when to go for this type of strategy.
Buying the supply or the demand side helps an organization control the chain and improves its effectiveness. A few other advantages of vertical integration are as follows:
- Better profit margins and a decrease in the cost of raw materials
- Improvement in the efficiency of the distribution channel
- Smooth supply of raw materials without any dependencies
If vertical integration isn’t for you, horizontal integration might just be what you need.
Horizontal Integration Strategy
A horizontal integration strategy provides value to an organization through mergers and acquisitions. In this methodology, an organization acquires another organization in the same industry to gain a competitive advantage.
A shoe organization may acquire another shoe organization if it allows them a greater share of the pie. Generally, horizontal integration growth strategy comes with long-term advantages.
Horizontal integration or mergers and acquisitions serve as lucrative options when:
- The organization has the potential to handle the daily operations of the newly formed entity while keeping it afloat
- The integration will most likely offer economies of scale
- Competitors lack the experience and the expertise to run the body that the newly formed entity has
- The organization has aggressive expansion plans in the process
Now, let’s see why horizontal integration works so well in certain cases.
Some pros of horizontal integration are:
- Its principal objective is expansion through mergers and acquisitions. If an organization buys another brand in the same industry but in a foreign land, it gets access to a new location while enjoying all the advantages that come with the new market
- Horizontal types of integration strategy allow businesses to demonstrate market power. In simpler terms, when a business acquires another organization, it also acquires its loyal customer base
- These strategies allow organizations to tap one another’s expertise and talent pool. This leads to new, differentiating products
- Mergers and acquisitions enable economies of scale. This lowers costs and boosts profit margins
These were the key reasons why horizontal integration works well.
Examples Of Integration Strategies
These are the most well-known examples of integration strategies:
Apple employs balanced types of integration strategy. It acquires supplying units and reaches out directly to end-users through its retail units.
Netflix follows vertical integration religiously by producing its content while reaching out to end-users through online channels.
Facebook’s Instagram is an integration strategy example considered a massive step in the industry that helped it retain its customers and cemented its position as a leading social media organization.
These examples demonstrate how integration strategy works in real-life scenarios.
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