BY OLUFEMI ADEDAMOLA OYEDELE.
Businesses operate with the collaboration or cooperation of other businesses. This they do to derive the benefits of division of labour. A tomato ketchup manufacturing company requires apple cider vinegar, tomato paste, sea salt, sugar and maple syrup. It also requires containers for packing the ketchup, labels for branding and cardboard boxes for packaging. The manufacturer may decide to depend on other businesses for the supply of these raw materials as a specialisation strategy. For a reliable supply-chain, some businesses acquire one or two or all of the processes that they undergo for their manufacturing. Some companies distribute their products through logistic companies or sell their products to ‘finishers’. These arrangements create more uncertainties and integration becomes inevitable to ensure process certainty.
Integration is the process of acquiring another business in a production process in order to be more certain; that is, be able to control the quality, cost and time of the product or service of an organisation. Integration is different from merger and acquisition. When two companies in the same business fuse together, it is called merger or acquisition depending on the structure of the deal. Integration is the acquisition of a complementary business either ahead, below or at the sides of a business. There are different types of integration. Vertical integration is a strategy that allows a company to streamline its operations by taking direct ownership of various stages of its production process rather than relying on external contractors or suppliers.
Backward integration is a form of vertical integration in which a company expands its role to fulfil tasks formerly completed by businesses up the supply chain. In other words, backward integration is when a company buys another company that supplies the products or services needed for production.
On other hand, forward integration is a business strategy that involves expanding a company’s activities to include control of the direct distribution of its products. It is the situation that occurs, for example, when a farmer decides not to sell cassava to agents and decides to sell directly to a cassava flake processing company or decides not to sell his fresh fish to agents and decides to sell directly to fish smoking company or freezing company as a way of controlling market price.
Integration is done not as a means of expansion but as a means of controlling all or major part of a business process in order to have control over production. If some cocoa farmers decide to buy a cocoa powder or beverage manufacturing company so that they do not supply cocoa to other manufacturers but process their cocoa themselves, they are practising vertical integration. Business organisations must continue to analyse and assess themselves through SWOT analysis. They must evaluate their strengths, weaknesses, opportunities and threats. It is in doing these that they can strategize on the way forward. Most businesses are in business to maximise profit and take advantage of opportunities. A poultry farmer who does not have reliable customers that serve as off-takers of his products may fail early in business.
Where a business has a ‘short shelf-life’ like old layers and unreliable customers, a manufacturer may consider integration as a strategy of remaining in business. A fast-food restaurant which depends solely on the supplies of other companies and found out that the suppliers of its wares are not dependable may decide to consider integration. Integration is also a means of reducing the cost of final products. Costco Wholesale Corporation is an American multinational corporation which operates a chain of membership-only big-box retail stores. As of 2020, Costco was the fifth largest retailer in the world and the world’s largest retailer of choice and prime beef, organic foods, rotisserie chicken, and wine as of 2016.
To have control on its wares, Costco registered the Kirkland brand and manufacturers like Starbucks, Humboldt Creamery, Niagara Bottling LLC, and Ocean Spray manufacture Kirkland signature products, including Kirkland bottled water. This is partial integration as Costco has control over the quality and volume of these products but not on cost. Costco is a warehouse store, and yet, its bakery churns out countless loaves of breads, cookies, cakes, and other baked goods each day. Justrite is a supermarket in Nigeria which produces its own eggs for sale in its various supermarkets across the country. When Obasanjo Farms Nigeria Limited (OFN) decided to register “Farm Fresh” products line and established “Farm Gate Supermarket” to sell these “Farm Fresh” products with “you have tasted the rest, now taste the best” slogan, which ranged from yoghourt, garri, elubo, smoked chicken, eggs, pork, fresh chicken, etc, it was practising integration.
An auto manufacturing company that decides to buy the business of a tyre manufacturing company or the business of an auto sales garage, and a property development company that acquires the business of a brick manufacturing company, are integrating these businesses. Business managers must be in control of the quality, cost and time of production of their products. Where these are not possible, the concerned business will go into extinction like the dinosaurs! A good business must be able to source its raw materials and have adequate dependable customers for its finished products. If possible, there must be alternative suppliers or distributors to avoid monopoly. Where monopoly is imminent, it will affect a company’s material requirement planning (MRP) and it is better for the business to consider integration or else, it will be integrated by the monopolist or go out of business.
A good notable example of a horizontal integration was Walt Disney Company’s $7.4 billion acquisition of Pixar Animation Studios in 2006. Walt Disney began business as an animation studio that targeted families and children and depended majorly on Pixar Animation Studio, before developing ‘Disney World’. A company is able to create a competitive advantage by integrating different stages of its production process and supply chain into its business. On Tuesday, March 8, 2022, Google announced that it plans to buy cybersecurity firm, Mandiant, for around $5.4 billion as part of an effort to better protect its cloud customers. The Mountain View, California, search giant said it will pay $23 a share for the publicly traded firm, which was founded in 2004. Google is doing this to have control over Mandiant and the cyber-security aspect of its business.
A newspaper company that sees printing as the most challenging part in its business process may decide to buy a printing company that is assisting it to print its papers (e.g., The Nation newspaper and Vintage Press). Another newspaper that sees a logistic company that helps it to distribute its products as the most important may decide to acquire the logistic company. MacDonald’s is a fast food restaurant with real estate interest. In 2020, MacDonald’s hauled over $9.0 billion as rent from its own properties. This was more than a third of its corporate revenue in the same year. MacDonald’s owns about 90 percent of the physical buildings where its restaurants are located (valued at $29.6 billion). This is integration of property business with restaurant business.