The strategic analysis of Vertical integration:

Vertical integration is the combination of technologically distinct production, distribution, selling , and /or other economic processes within the confines of single firm.
It represents a decision by the firm to utilize internal or administrative transactions rather than market transaction to accomplish its economic purposes.

For e.g. a firm with its own sales force could contracted, through the market, an independent selling organization to supply the selling services it requires.

Strategic benefit and costs of Vertical Integration

Vertical integration has important generic benefits and costs which need to be considered in any decision.
In a vertical chain, the upstream firm is the selling firm and the downstream firm is the buying firm in the vertical chain

Strategic beneficiate of Integration

Economics of integration: the most commonly cited benefit of vertical integration is the achievement of economics , or cost savings in join production, sales , purchasing control and other areas.

Economies of combined operations

By putting technological/distinct operations together, the firm can sometimes gain efficiencies. Facilities can be co-located

Step eliminates transportation costs which are substantial for a hazardous and difficult logistic plan

Economics of internal control and coordination

Costs of Scheduling, coordinating operations, and responding to emergencies may be lower if the firm is integrated.

Adjacent location of the integrated facilitates coordination and control Such economies of control can reduce idle time, the need for inventory and need for personnel in the control function.

Economics of internal control and coordination

Costs of Scheduling, coordinating operations, and responding to emergencies may be lower if the firm is integrated.

Adjacent location of the integrated facilitates coordination and control Such economies of control can reduce idle time, the need for inventory and need for personnel in the control function.

Economies of information

Integrated operations may reduce need for collecting some types of information about the market or likely by may reduce the overall cost of saving information. Market information may well flow more freely in an organization then through a series of independent participants.

Economies of avoiding the market

By integrating the firm potentially saves on some of the selling, price shopping, negotiating transaction costs of market transactions.

Economies of stable relationship

Specialized procedures for dealing with customer or supplies can include dedicated, specialized logistical systems, special packaging, unique arrangements for record keeping and control as also potentially cost saving ways of interacting. It is possible that stability of the relationship will allow the upstream unit to tune its

Characteristics of vertical integration

A firm with a strategy of low cost production may place a greater value on achieving economics of all types.

Similarly, a firm with weakness in marketing may save more by avoiding market transactions
Tap into technology

Offset bargaining power and input cost

Characteristics of vertical integration

If a firm is dealing with suppliers or customers who wield significant bargaining power and reap returns on investment in excess of the opportunity cost of capital Enhanced ability to differentiate

Vertical integration can improve the ability of the firm to differentiate itself from others by offering a wider slice of value added services under the control of

Characteristics of vertical integration

Elevate entry and mobility barriers

Benefits to the integrated firm vis-a- vis an integrated firm are in form of better prices, lower costs and lower risks.

Extra High return business

Vertical integration will increase overall return on investment.

Characteristics of vertical integration

Defend against foreclosure Widespread integration by competitors can tie up many of the sources of supply on devisable customers or retail outlets Will lead to problems for unintegrated firms.

Strategic costs of integration

Strategic costs include:Entry Cost Flexibility Balance Ability to manage the integrated firm Use of internal organizational incentives/

market incentives.

Cost of overcoming mobility barriers

Vertical integration obviously requires the firm to overcome the mobility barriers to compete in the upstream or downstream barriers Overcoming barriers caused by cost advantages from proprietary technology on favorable source of raw materials can be a cost of vertical integrations incentives.

Increased operating language

Vertical integration increases the proportion of a firms costs that are fixed If a business has low fixed costs, the effective increase in operating leverage can be minor

Reduced flexibility to change partners

Vertical integration implies that the fortunes of a business unit are at least partly tied to the ability of its in house suppliers on customers (who might its distribution channel) to compete successfully. Extent of this risk depends on a realistic assessment of the likelihood that the in house supplier or customer will get into trouble and the likelihood of external or internal changes that will require adaptation

Higher overall exit barriers

Integration that further increases the specialization of assets, strategic interrelationships may raise the overall exit barriers

Capital investment requirement

Vertical integration consumes capital resources, which have an opportunity cost within the firm, whereas dealing with an independent entity uses investment capital of outsiders

Foreclosure of access to supplies or consumer research or know how

Integration usually means that a company must accept responsibility for developing its own technological capability rather than piggy backing on others
If it does not the suppliers are often willing to support the firm aggressively with research, engineering assistance and the

Maintaining balance

Productive capacities of the upstream and downstream units in the firm must be held in balance or potential problems arise Vertical stages go out of balance for a variety of reasons. Technological change in one stage may require changes in methods that effectively increase its capacity relative to the other stage or changes in product mix and quality may

Dulled incentives

Vertical integration means that buying and selling will occur through a captive relations Declining house can reduce incentives

Incentives for the upstream movement may be dulled because it sells in house instead competing for the business

Conversely, the business buying internally from another unit with company may not bargain as it hard as its would with outside vendors.

Differing Managerial Requirements

Business can be differed in structure, technology and management despite having a vertical relationship.

Manufacturing and retailing are fundamentally different A management capable of operating one part of the vertical chain very well may be incapable of effectively managing the other, to put the point in its most extreme form.

Designing the Sales Force

Most industrial companies rely heartily on a professional sales force to locate prospects, develop them into customers and grow the business, or they hire the manufacturers representatives and agents to carry out the direct selling task. In addition many consumer companies use a direct selling force: insurance agents, stockbrokers, and distributors work for direct sales organization such as Avon, Amway,

Sales Representatives

Deliverers A salesperson whose major task is the delivery of a product (water, fuel) Order taker- A salesperson who acts predominantly as an inside order taken (salesperson standing behind the counter) or outside order taker (the soap salesperson calling on the supermarket manager) Missionary- a salesperson who is not expected to take an order but whose major task is to build goodwill or educate the

Sales Representatives

Technician- A salesperson with a high level of technical knowledge (the engineering salesperson who is primarily a consultant to client companies) Demand Quote- A salesperson who relies on creative methods for selling tangible products (Vacuum cleaners, cleaning brushes) or intangibles (insurance, advertising and education) Solution Vendor- A salesperson whose expertise is in solving of a customers problem, often with a system of the

Sales Force Objectives and Strategy

Prospecting Searching for prospects or leads

Targeting deciding how to allocate their time among prospects and customers
Communicating Communicating information about companys products and services Selling Approaching, presenting , answering questions, occurring

Sales Force Objectives and Strategy

Servicing Providing various services to the customers consulting on problems, rendering technical assistance, arranging finance, expending delivery.

Information gathering Conducting market research and doing intelligence work

Allocating Deciding which customers will get scarce products during product

Sales Force Structure

One product line to one and using industry with customers in many locations would use a territorial/ structure. A company which sells many products to many types of customers might need a product or market structure

Sales Force Size

First establish the number of customers to be reached , then use a work board approach to establish
Sales force size E.g. 1000 A- Accounts 2000 B- Accounts / Country Status A account require 36 calls a year B account require 12 calls a year Total calls A+B = 60000 (36000+ 24000) Average up con make 1000 call a year No. of salesperson: 60000/1000 =60

Sales Force Compensation

Salary Variable amount (commissions, bonus on profit sharing ) Expense allowance Benefits

Managing the sales force

Recruiting and selecting representatives Training and supervising sales representatives Sales reproductively Motivating sales representative

Evaluating sales representatives

Principles of Personal Selling

Prospecting and Qualifying

- Identify and qualifying prospects - Hot/ warm/ cold categorization

Pre- approach
- Learn about the prospect

- Decides on best contract approach which might he a personal visit, a phone call or a letter. Presentation and demonstration - AIDA GET attention - Hold Interest

Principles of Personal Selling

Overcoming objection Closing Follow up and maintenance Miscellaneous -Negotiation - Relationship Marketing

International Market Promotion

Product policy and planning - Product decision is among the first decision a marketing manager makes in order to develop a marketing mix.

International Product planning

Product objectives emerge from the host country and corporate objectives are combined the business definition. The companys goals usually are stability, growth, profits and return on investment. Stated differently, the corporate objectives may be defined in terms of activities (the manufacture of a particular product or export to a particular market), financial indicators (to achieve a targeted return on investment), desired position (its market share and relative market leadership and all

Perspectives of International Product Planning

Corporate
Objectives Product Objectives Business definition of the country Country Objectives

Product offering

Marketing Mix

Customer Satisfaction

Product Design Strategy

Decision criteria Nature of Product Market Development

Legal requirements Competition Support system Physical Environment Market conditions

Cost/ Benefit relationship

Standardization

A recent study on the subject lends support to the high propensity to standardize all or parts of marketing strategy in foreign markets. An extremely high degree of standardization appears to exist in land names, physical characteristics of product and packaging.

Rewards of Adaptation

Although standardization offers benefits too much attachment to standardization can be counterproductive.

Marketing environment from country to country, and thus a standard product originally conceived and developed in the US may not really match the conditions in each and every market.

Developing an International Product line

Extension of domestic line Introducing additional products to the international line Introducing a new product in a host country

New Product Development Process (Six Steps)

Idea Screening Evaluation Prototype product Market testing Entry

Management of Product line

A few generalizations are required to be made for managing an international product line: Product segmentation

Product design

Product quality
Product innovation

R & D in the home country

Critical mass and economies of scale

Easier communication

Better production of know-how

More leverage with host government Ease of control of coordination

Adoption and diffusion of New Products

Customers DO not instantly buy new products. They go through a step by step mental process of acceptance or rejection of any new product.

Awareness (Exposure to a new product) Knowledge Evaluation Trail Adoption

Product related characteristics

Relatives advantages

Compatibility
Complexity

Divisibility
Communicability

Customer innovativeness
Need perception Economic ability

Foreign product diversification

Diversification refers to seeking unfamiliar products or unfamiliar markets or both for expansion. Diversification can also be a risky strategy and a company should choose this path only when current product/ market orientation seems to provide no further opportunities for growth.

Brand Strategy

Brand alternatives
An overseas marketer has several alternative ways to decide on the brand name:

Use one name with NO adaptation to local markets Use one name but adapt and modify for each local market Use different names in different markets for same products Use the company name as brand name under one house style on the corporate umbrella approach.

Brand Piracy

Counterfeiting Lows pertaining to bound piracy in many countries are loose with little punishment for shady practices Three forms of piracy - Imitation: copying an established hand. -Faking refers to identifying the fraudulent product with a symbol, logo or brand name that is very similar to the famous brand.

- Piracy through preemption of brand names is feasible in those countries where the low permits wholesale registration of brand names. In Monaco for e.g. a person registered 300 famous brand names such as Chase Manhattan, Bankers Trust, Scare, Texaco, NBC amd CBS.

Brand Piracy

Counterfeiting Lows pertaining to bound piracy in many countries are loose with little punishment for shady practices Three forms of piracy - Imitation: copying an established hand. -Faking refers to identifying the fraudulent product with a symbol, logo or brand name that is very similar to the famous brand.

- Piracy through preemption of brand names is feasible in those countries where the low permits wholesale registration of brand names. In Monaco for e.g. a person registered 300 famous brand names such as Chase Manhattan, Bankers Trust, Scare, Texaco, NBC and CBS.

Private Branding for Foreign Markets

International Packaging Promotional

100% takes into account requirements of four groups of people

Customers

Shippers
Distributors Host Government International warrantees and services

Private Branding for Foreign Markets

Warranties

Competitive tool Grantee from the manufacturer that the product will perform as stipulated Standard warranty vis--vis customized warranty - Nature of the market - Environmental conditions (tear, wear) etc.

Private Branding for Foreign Markets

Services

Constitute an offer to maintain the original product through occur having, replacement of parts adjustments and the like.

- Formulation of a service policy requires objective assessment of needs.

Rationale for seeking comparative advantage

Nations seek to increase the material standard of living of its people. Living standards increase as a function of productivity With greater productivity , the same amount of labor yields more goods and services As productivity increases, greater material wealth results Productivity leads to specialization of production

Trade Barriers
Two types of Trade Barriers Tariffs barriers

Non-tariffs barriers

Trade Barriers

Tariffs refer to taxes levied on goods moved between nations Most important of these is the tax usually called the customs duty, which is levied by the importing nation A tax may also be imposed by the exporting nation and is called an export tax. A country through which goods pass on their way to their destination may impose a transit tax. N.B Real purpose behind trade barriers is

Arguments for protection

Keep money at home argument transfer of national wealth in exchange with another nation for goods.

Home market argument Equalization of costs of production argument. To make local goods competitive against imports which may be cheaper due to technological advantages Employment argument

Arguments for protection

Anti- dumping argument Impart industry argument

Bargaining and retaliation argument to seek reduction of tariffs by other country or to retaliate against another country
National security argument

Tariff Barriers

Different nations handle tariff barriers differently A country may leave a single tariff system for all goods from all sources. This is called uni-linear or singlecolumn tariff. Another type of tariff is the general conventional tariff. This tariff applies to all nations except those that have tariff treaties (or a convention to that effect) with a particular country.

Tariff Barriers

A tariff may be worked out on the basis of a tax permit, called specific duty or as a percentage of the item, which is referred to as advalorem duty. Sometime both may be levied on a specific item as combined duty.

Non Tariff Barriers

They include:

Quotas
Import equalization taxes

Road taxes
Laws giving preferential treatment to domestic suppliers, administration of anti dumping measures, exchange controls, and a variety of invisible tariffs that impede trade

Principal Non Tariff Barriers

Specific limitation on trade

Customs and administrative entry procedures Standards

Government participation in trade

Charges on import
Other categories.

Recent was Uruguay round addressed issues such as tariff services and trade related aspects of intellectual property and investment measures. Uruguay round was completed on Dec 15, 1993. (After 07 years of negotiations) 117 countries (including the US signed the agreement) Motive: to reduce trade barriers and create more comprehensive and

GATT (General agreement on Tariffs and Trade)

Unlike GATT, WTO panel decisions are binding. If one nation a makes a complaint to the WTO that another nations laws or decisions are nonbinding and in violation. Agreement was signed in April 94 Went into operationalisation w.e.f. 01 Jan. 95 Agreement created WTO (World Trade Organization) on 01 Jan; 95 WTO implements the agreement and provides a forum for: Negotiating additional reduction of trade barriers Setting policy disputes

GATT (General agreement on Tariffs and Trade)

Enforcement of trade rules

WTO

World trade organization rules apply to 90% of world trade Stronger enforcement mechanism in WTO

Member countries as on date are 125 (nearly the whole of the world except China

WTO works to eliminate non- tariff barriers, can be used to challenge environment, health and other

WTO

Stronger enforcement powers represent a shift in power from citizens and national government to unelected bureaucrats. Unlike GATT, WTO panel decisions are binding. If one nation makes a complaint to the WTO that another nations laws or decisions are non-binding and in violation of WTO rules, WTO can enforce WTO standards

Marketing Memo
Helping stores to sell!

Attract shoppers and keep them in the store Honour the transition zone :- Make sure there are clear sight lines. Make merchandise available to reach & touch Men do not ask questions as a rule. Women need space Make checkout easy

Retail Category Management

Step Define the category What is means Draw the line between product categories. Alcohol & soft drinks as one beverage category ?? or separately managed How des the category fills / fits into the store ? destination category vis--vis fill-ins Analyze sales data Agree on category objectives

Figure out the role

Assess performance Set goals

Choose the audience

Figure out the tactics

Sharpen focus for maximum effect

Decide product selection promotion merchandising and achieve category goals Set time table / execute

Implement the plan

Growth and type of wholesaling

Wholesaling will retain importance and see decent growth due to spurt in consumer purchasing

Growth and type of wholesaling

Merchant wholesalers
- Independently owned businesses - Will take title to merchandise

Merchant wholesalers Handles:

Full service wholesalers Carry stock maintain, a sales force, offer credit , make deliveries , provide management assistance Limited service wholesalers - Cash and carry wholesalers sell a limited line of fast moving goods to small retailers for cash - Truck wholesalers sell and delivers a limited line of semi- perishable goods to supermarkets, goods stores hospitals etc.

Functions

Selling and Promoting: wholesalers sales forces help manufactures reach many small business, customers at relatively low cost.

Buying and assortment building

Bulk breaking

Warehousing
Transportation Financing Risk bearing

Functions

Market Information Management services and counseling Drop shippers secure bulk industries such as coal, heavy equipment etc.

Rack jobbers serve grocery retailers in nonfood items.

Mail order wholesalers sent catalogues to retail, industrial and institutional customers. Orders are filled and sent by mail, plane or truck

Functions
Brokers and agents- Facilitate buying selling- limited functions Manufacturers and retailers branches and offices- wholesaling operations are conducted by sellers or buyers themselves rather than through independent wholesalers. Specialized wholesalers - Agricultural assemblers (output of many farms) - Petroleum bulk plants and

Factors affecting demand and supply of U.S Dollars

1. Factors increasing supply of US dollars in world markets. 2. Impact of merchandise 3. Impact of gold and silver 4. Payments to foreign ships for straight and passenger service. 5. American tourist expenditure abroad. 6. Banking and all other financial charges payable to foreigners 7. Interest and dividends due on American securities held aboard 1. Factors increasing demand for U.S. Dollars in world Markets. 2. Export of Merchandise 3. Exports of gold and silver 4. Foreign tourists expenditures in the US 5. Banking and other financial charges receivable form foreigners 6. Interest and dividends due on foreign securities in US 7. New sale of American securities abroad.

Factors affecting demand and supply of U.S Dollars

Supply New Purchase of foreign securities Repurchase and redemption of American securities held abroad Transfer of American balances to foreign bands US govt. grants and loans Demand Repurchase and redemption of foreign securities held here (U.S) Transfer of foreign balances to American banks.

International Monetary System

Trade settlements involves topic such as determination of foreign exchange rates, balance of payments, foreign exchange transactions, international financial flows and international financial and trade institutions. Each country has its own currency through which it expresses the value of its goods

International Monetary System

For international trade settlements, however, the various currencies of the world must be transformed from one into the other. This is accomplished by foreign exchange markets.
1. Negotiations to establish postwar international monetary system took place at Brethonwoods, New Hampshire in 1944.

2. Economically disastrous post war period.

3. Recommendations:

International Monetary System

Each nation should be at liberty to use micro-economic policies for full employment (Tent ruled out return to Gold standard)

Free floating exchange rates could not work extremes of both permanently fixed and floating rates should be associated.

Monetary system should recognize that exchange rates were both a national and international concern

International Monetary System

Sustained a rapidly increasing volume of trade and investment. Displayed flexibility in adapting changes in international commerce to

Proved to be efficient
Proved to be hardy Allowed a growing degree of international cooperation established a capacity to accommodate reforms and improvements.

Foreign Exchange
Foreign exchange is the monetary mechanism by which transactions involving two or more currencies takes place It also refers to exchange of one countrys money for another countrys money Foreign exchange transactions present two problems. - Firstly each country has its own methods and procedures for effective foreign exchange- usually developed by

Historical perspective on making payments across national boundaries:Gold standard refers to using gold as the medium of exchange for effecting foreign commercial transactions. Before World WarI, most countries followed the gold standard. Gold exchange standard: this means that the foreign exchange rate of a currency is set in relation to that countrys gold holdings Gold bullion standard amounts to holding an adequate quantity of gold in reserve in bar or bullion form to settle international transactions at the level of government

Factors affecting demand and supply of US Dollars

Factors increasing supply of US Dollars in world Markets Import of Merchandise Factors increasing demand for US Dollars in World Markets Export of Merchandise

Imports of gold and silver

Payments to foreign ships for passenger service American tourist expenditure abroad Banking and all other financial charges payable to foreigners Interest and dividends due on American Securities held abroad New purchase of foreign securities Repurchase and redemption of American securities held abroad Transfer of American balance to foreign banks US Govt. grants and loans

Exports of gold and silver

Foreign tourists expenditures in the US Banking and other financial charges receivable from foreigners Interest and dividends due on Foreign securities in USA New sales of American Securities abroad Repurchase and redemption of foreign securities held here (US) Transfer of foreign balance to American Banks

Balance of Payment

Balance of Payment
The balance of payments of a country summarizes all the transactions that have taken place between its residents and foreigners in a given period, usually a year! Transactions refers to imports and exports of goods and services, lending and borrowing of funds, remittance, government and military expenditures. Residents: includes all individuals and business enterprises, including financial institutions, that are permanently residing within a countrys borders as well as government agencies at all levels. In other words balance of payments reflect the totality of a countrys economic relations with the rest of the world .

Factors affecting demand and supply of US Dollars

Most currencies today are inconvertible. This refers to currencies that cannot converted or exchange for other currencies. Currencies may be labeled hard and soft Hard- in great demand Soft- relatively easily available. Developing nations currencies are generally soft. Most countries set lower values on