Vertically integrated strategic extension

When Samsung Electronics, a pure-play semiconductor company, decided to transform its business, it took action. In just four years, the market share and profit of Samsung Electronics' DRAM (Dynamic Random Access Memory) products climbed to the top in the world.

However, this is just the beginning. The company invests profits from semiconductor production into emerging industries such as wireless communications and computers. The production of multiple products went hand in hand, and Samsung was widely praised for its innovation.

Now, many Chinese companies are trying to find ways to increase the economic value of Samsung Electronics' business. Under the dual competitive pressure of overseas enterprises and lower-cost domestic enterprises, enterprises in various industries are looking for the correct strategic development direction in their respective business fields and new or related fields to strive for greater profits.

In order to achieve this goal, some companies have begun to consider "vertical integration"—continuing to develop downstream industries ("forward integration") or back into upstream industries ("backward integration"). The approach of a business like Samsung Electronics is to go forward with integration, directly producing what its customers produce, thus entering the customer's production area. Backward integration, on the other hand, is the independent production of products purchased from suppliers in the past, in order to penetrate into the business scope of their suppliers.

In the West, it is widely believed that vertical integration was only a flash in the pan in the 1980s and 1990s. Since then, Western companies have been working in the opposite direction, focusing on fragmented operations. In this regard, the development trend of Asia, especially China, is completely different from the international trend, which makes many Western professionals criticize the Asians' preference for integrated management.

Strategically speaking, this criticism is unassailable, but it ignores the specific reality of the region: incomplete industrial value chains provide room for integration and extension.

Rationale for Forward Integration: Breaking Sales or Technology Bottlenecks

Businesses often decide to forward integration in order to solve growing sales or technology problems. Sales have become a big problem due to underdeveloped transportation facilities in Asia, including China. Therefore, some enterprises that produce consumer goods have established extensive sales networks and carried out forward integration into the sales field. By controlling sales, a company can respond faster to customer needs, provide better after-sales service, and gain more potential advantages, thus leading its competitors.

Enterprises can also be forward-integrated in terms of technology. For example, a component manufacturer can make full use of its own components and develop into the field of assembly. Japan's Kyocera Corporation was originally a silicate material manufacturer, providing various electronic components and porcelain components for other manufacturers. Now, Kyocera has become one of the large electronic conglomerates by producing electrical products such as telephone equipment and digital cameras in addition to its original production scope.

Integration perspective: adding value around customers

More importantly, companies should view integration from the perspective of value growth, each step of development means creating higher value, just like climbing value 's peak. Jan Dyer Torsilieri and Chuck Lucier aptly compared this value growth to a ladder in Strategy + Business magazine. They write: “At the lowest rung, the supplier only sells products or services, and customers rely on their knowledge to procure the desired product and use it effectively. At the higher rung, the supplier uses its rich Knowledge provides value-added integration services, that is, integrating products and services into an organic system for sale to customers. This is commonly referred to as an 'integrated solution'."

A good integration solution answers this question , that is, in which market segments must our customers be successful? How can we be a partner to our customers and help them achieve this? Various businesses in the computer industry are working on this service. In fact, some prosperous businesses are simply "integrated companies" that start out entirely by integrating systems for their customers.

Tosrielli and Lucia go on to describe: "At the third level of the ladder, it is the supplier's responsibility to help customers create revenue and to pass on this value to the customer. Finally, on the ladder, At the highest level, suppliers are actually responsible for ensuring that customers are successful in their respective fields.”

The value-enhancing effect of integration, especially the forward integration strategy, is of great practical significance to Chinese enterprises. . For a long time, a difficult dilemma faced by Chinese enterprises is vicious low-price competition based on low-value. This is because, on the one hand, the traditional planned economic system that ignores the market and blindly expands production has resulted in structural oversupply and low-level repetitive products and industrial structures. Businesses and industries are getting worse, and the value gap is widening. Generally speaking, the downstream of an industry is a higher value business area than the upstream. Forward integration allows the business to extend to the downstream of high-value industries. If managed properly, it can increase the value of the business and get rid of its own inherent low-value competition dilemma. At the same time, it can freely cope with the competition of global integration under the conditions of WTO opening. pressure.

The rationale for backward integration: Guaranteed supply of raw materials and components

No matter where a business is on the value ladder, it is maintaining the market for its product or service. In addition, integration helps ensure the supply of raw materials and components. If there is a chronic shortage of an important raw material required by the enterprise, it must consider whether it should be backward integrated and produce this raw material on its own. Coca-Cola's sub-packaging plants in Asia generally purchase carbon dioxide gas for bottling. However, because carbonation gas suppliers are often not comparable to Coca-Cola in terms of scale, subpackaging units are often unable to ensure adequate supplies. Therefore, some sub-packaging manufacturers will naturally invest in their own production of carbon dioxide gas.

Currently, this factor leading to backward integration exists in many industries in Asia. In fact, one of the main reasons for the rise of large conglomerates in this region is to ensure an adequate supply of key raw materials for companies. When an enterprise considers backward integration, it usually compares the cost of its own production with that of external procurement. At this point, Michael Porter constantly reminds companies to factor in the costs and difficulties of managing an enlarged conglomerate when conducting cost comparison analyses.

Get rid of the shackles of inertia: redefine the industry in which you are located

Although any business strategy can only be transformed from an ideal into a reality if it is implemented in the organizational framework of the enterprise, the organization itself is inherent It restricts the strategy and makes it rigid, thereby reducing the effectiveness of the strategy.

To increase the flexibility of value enhancement strategies, including integration, companies may wish to take "business" into account. Many companies have always assumed that their business is unchanged when analyzing their organizations. In this way, the business strategy based on business and relying on business will not undergo essential changes, and it is natural to lose flexibility due to the constraints and constraints of various organizational factors. middle.

In fact, a firm redefining its business can greatly enhance its business value while enhancing strategic flexibility. The watches and clocks produced by Swiss companies are world-renowned for their invaluable value and elegance. But the leader of the world's watch industry was almost defeated by competitors from Japan, the United States and even Hong Kong. At that time, watch production in Switzerland was extremely fragmented, and production resources were mainly concentrated in the upstream with low added value. A single watch is produced by 30 different companies, each of which only produces a few parts. Competitors from Japan, the United States and Hong Kong, leveraging emerging electronic technology to create electronic watches with higher value for customers, soon eroded most of the market from Swiss watchmakers.

In this time of crisis, Swiss companies are taking a fresh look at their watch business. They found that if the clocks were only viewed as time-counting machines, the clocks business was only making and providing time indicators for people, and the timepieces they made did not provide customers with a transfer value that could match their competitors. However, if the clock is regarded as a precious gift that can indicate time and a symbol of identity, it is obviously more valuable than an electronic watch that is only a time indicator.

It's really a matter of success or failure!

By redefining the business, they adjusted the production design resources to the mid-stream and downstream areas with higher added value and their strengths, and took management measures such as rebuilding a corporate culture designed to encourage innovation, to reverse the decline in one fell swoop and eventually recover. A lot of lost ground.

The business of an enterprise is always subordinate to a certain industry and oriented to a certain group of customers (markets). And a certain industry can be divided into its sub-industry and grandchild industry downward, and can be traced back to its parent industry and grandmother industry. The flexible flexibility of industry boundaries provides a reliable space for companies to discover strategic opportunities by skillfully defining their business, thereby enhancing business value.

The end of integration: can not expand endlessly

Businesses will always encounter various opportunities, have the opportunity to enter a new business field. The risk of this development strategy is quite high. There are indeed many businesses that have successfully climbed the ladder into higher-value areas of business. But there are just as many businesses that have had problems, and sometimes slumped.

Marketing expert Al Ries warns companies to beware of "losing focus" when undertaking vertical integration. He said: “A business cannot expand its operations indefinitely. Whether you call it product line expansion, diversification, or synergy, the desire to expand and integrate will ultimately de-emphasize the business. ."

Reese cites numerous examples of this. Xerox made a foray into financial services, exiting after losing a total of $700 million. Westinghouse was devastated by failures in financial services. Matsushita bought MCA and was forced to sell it less than six years ago. And insurance giant Metropolitan Life is selling again just six years after buying Century Real Estate.

To be integrated and successful, to borrow a metaphor that Jim Collins likes to use, a business must be like a hedgehog. Hedgehogs are simple and focused animals. Only concerned with finding food and tidying up your home. A company like a hedgehog will never try to do anything beyond its own power. Instead, they only care about three things: what they do best, what they love to do, and what gives them ample cash flow and profits. Businesses that meet all three conditions are their goals. Collins said: "The development strategies of excellent enterprises are all based on a deep understanding of these three conditions."

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