Vertical Integration: Owning the Channel

1. Vertical Integration:Owning the Channel Chp. 7 with Duane Weaver

2. VERTICAL INTEGRATION • Should only one organization do all the work? • Downstream integration (manufacturer integrates a distribution function) • Upstream integration (channel member such as retailer may assume its own brand or product) • ULTIMATE QUESTION: Integrate or Outsource??

3. COSTS & BENEFITS OF VERTICAL INTEGRATION (VI) • Degrees of VI (see Fig. 7.1) • Classical • Quasi-Vertical • Vertical • Costs & Benefits • Opportunity cost of personnel (from manufacture to distribution) • Lack of channel expertise (underestimation of channel needs) • Insufficient managerial resources • More Control (psychologically appealing), but is it over economic results • Increased profit potential • New Growth Opportunities (e.g. maintenance) • Amortization of “knowhow” throughout the stream • Terms of Payment/3rd Parties • Margin, commission, royalty, future rights or barter • Exchange of Vertical channel risks in return for increased profit

4. VI Forward: Economic Framework • Efficiency • …to maximize overall efficiency for the long run (ratio of next effectiveness to overhead- results to resources) • Outsourcing as a Startpoint • Motivation • Specialization • Economically Fittest • Economies of Scale • Heavier Market Coverage • Independence from any single manufacturer • When Competition is Low “the accumulation of company-specific assets creates an economic rationale to vertically integrate” • Company specific capabilities (barriers to entry) • Lack of leverage (threat) • Opportunism avoidance

5. Company-Specific Capabilities • Idiosyncractic knowledge – cannot be readily redeployed • Relationships – distributor/manufacturer personnel expeditious in nature • Brand Equity – in those instances where downstream channel members have an influence on the brand’s equity • Dedicated Capacity – represents overcapacity in lieu or channel partner • Site Specificity – e.g. distribution outlet near a remote manufacturer or manufacturer needing a warehouse in a market void of distributors • Customized physical facilities – proprietary hardware and software and other physical adaptations that binds an upstream or downstream channel partner (e.g. SHIPPING) • SWITCHING COSTS – set-up/take-down (1 time)

6. VI for Environmental Uncertainty • When an environment is difficult to forecast due to dynamics or complexities. Volatile. A OR B? • Manufacturer should take control to cope with volatility(3rd party switching?) • Do not commit to any distribution system until uncertainty is reduced(litotes difficulty of organization change to match market volatility).

7. VI to reduce Performance Ambiguity • The latter discussions focused on the failure of a market to produce alternate bidders, necessitating some VI(thus you can afford to perform poorly) • What about: a failure of information? • Normal:Bid Monitor  Reconsider  Re-bid • Performance Ambiguity: • No baselines to measure against (radically new, innovative, inability to measure) • Poor quality measures (untimely, inaccurate)

8. Summary of Decision Framework • Fig. 7.3, p. 190 • Fig. 7.4, p. 191

9. Group Discussion Questions • P. 196 Questions: • 2 • 4 • 5

10. THANKS! • Have a great day!