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CHAPTER 5 • STRATEGIES IN A a i O N 139

integration Strategies Forward integration, backward integration, and horizontal integration are sometimes col- lectively referred to as vertical integration strategies. Vertical integration strategies allow a firm to gain control over distributors, suppliers, and/or competitors.

Forward Integratlois Forward integration involves gaining ownership or increased control over distributors or retailers. Increasing numbers of manufacturers (suppliers) today are pursuing a forward inte- gration strategy by establishing Web sites to directly sell products to consumers. This strat- egy is causing tunnoil in some industries. For example, Microsoft is opening its own retail stores, a forward integration strategy similar to rival Apple Inc., which currently has more than 200 stores around the world. Microsoft wants to learn firsthand about what consumers want and how they buy. CompUSA Inc. recently closed most of its retail stores, and neither Hewlett-Packard nor I B M have retail stores. Some Microsoft shareholders are concerned that the company's plans to open stores w i l l i rk existing retail partners such as Best Buy.

Automobile dealers have for many years pursued forward integration, perhaps too much. Ford has almost 4,000 dealers compared to Toyota, which has fewer than 2,000 U.S. dealers. That means the average Toyota dealer sold, for example, 1,628 vehicles in 2007 compared to 236 vehicles for Ford dealers. C M , Ford, and Chrysler are all reducing their number o f dealers dramatically.

The Canadian company Research in Mot ion ( R I M ) opened its first online store for BlackBerry applications in Apr i l 2009. R I M is looking to tap a market for softwai'e made popular by Apple and its iPhone. BlackBen-y users can download the new R I M storefront from the main R I M Web site, but then they need to buy apphcations using PayPal.

A n effective means o f implementing forward integration is franchising. Approximately 2,000 companies in about 50 different industries in the United States use franchising to distribute their products or services. Businesses can expand rapidly by fran- chising because costs and opportunities are spread among many individuals. Total sales by franchises in the United States are annually about $1 tr i l l ion.

In today's credit cninch reduced availability of financing, franchiser firms are more and more breaking tradition and helping franchisees out with l iquidity needs. For example, R E / M A X International wi l l finance 50 percent of its initial $25,000 franchise fee. Coverall Cleaning Concepts lends up to $6,800 of its initial franchise fee. Persons interested in becom- ing franchisees should go onto franchising blogs, such as Bleu MauMau, Francliise-Chat, Franchise Pundit, Rush On Business, Unhappy Franchisee, and WikidFranchise.org. These sites offer inside news, advice, and comments by people already owning fi-anchise businesses.

However, a growing trend is for franchisees, who for example may operate 10 fran- chised restaurants, stores, or whatever, to buy out their part of the business f rom their franchiser (corporate owner). There is a growing rift between franchisees and franchisers as the segment often outperforms the parent. For example, McDonald's today owns less than 23 percent of its 32,000 restaurants, down from 26 percent in 2006. Restaurant chains are increasingly being pressured to own fewer of their locations. McDonald's sold 1,600 of its La t in America and Caribbean restaurants to Woods Staton, a former McDonald ' s executive. Companies such as McDonald's are using proceeds from the sale of company stores/restaurants to franchisees to buy back company stock, pay higher dividends, and make other investments to benefit shareholders.

These six guidelines indicate when forward integration may be an especially effective strategy:^

• When an organization's present distributors are especially expensive, or unrehable, or incapable o f meeting the firm's distribution needs.

• When the availability o f quality distributors is so limited as to offer a competitive advantage to those firms that integrate forward.

• When an organization competes in an industry that is growing and is expected to continue to grow markedly; this is a factor because forward integration reduces an organization's abihty to diversify i f its basic industry falters.

CHAPTER 5 • STRATEGIES IN ACTION 143

These five guidelines indicate when product development may be an especially effective strategy to pursue:' '

• When an organization has successful products that are in the maturity stage of the product life cycle; the idea here is to attract satisfied customers to by new (improved) products as a result of their positive experience with the organization's present products or services.

• When an organization competes in an industry that is characterized by rapid technological developments.

• When major competitors offer belter-quaUty products at comparable prices. • When an organization competes in a high-growth industi7. • When an organization has especially strong research and development capabilities.

Diversificatioo Strategies There are two general types o f dlveisification strategies: related and unrelated. Businesses are said to be related when their value chains posses competitively valuable cross-business strategic fits; businesses are said to be unrelated when their value chains are so dissimilar that no competitively valuable cross-business relationships exist.'-^ Most companies favor related diversification strategies in order to capitahze on synergies as follows;

• Transferring competitively valuable expertise, technological know-how, or other capabilities from one business to another.

• Combining the related activities of separate businesses into a single operation to achieve lower costs.

• Exploiting connnon use of a well-known brand name. • Cross-business collaboration to create competitively valuable resource strengths

and capabilities.'--

Diversification strategies are becoming less popular as organizations are finding it more difficult to manage diverse business activities. In the 1960s and 1970s, the trend was to diversify so as not to be dependent on any single industry, but the 1980s saw a general reversal of that thinking. Diversification is now on the retreat. Michael Porter, o f the Harvard Business School, says, "Management found it couldn't manage the beast." Hence businesses are sell ing, or closing, less profitable divisions to focus on core businesses.

The greatest risk of being in a single industry is having all of the firm's eggs in one basket. Although many firms are successful operating in a single industry, new technolo- gies, new products, or fast-shifting buyer preferences can decimate a particular business. For example, digital cameras are decimating the f i lm and f i lm processing industry, and cell phones have permanently altered the long-distance telephone calling industry.

Diversification must do more than simply spread business risk across different indus- tries, however, because shareholders could accomplish this by simply purchasing equity in different firms across different industries or by investing in mutual funds. Diversification -"3,kes sense only to the extent the strategy adds more to shareholder value than what

' . -c";ders could accompHsh acting individually. Thus, the chosen industry for diversifi- cation must be attractive enough to yield consistently high returns on investment and offer potential across the operating divisions for synergies greater than those entities could

sc}?/eve aJone.

A few companies today, however, pride themselves on being conglomerates, from small firms such as Pentair Inc., and Blount International to huge companies such as

Textron, A l l i e d Signal, Emerson Electric, General Electric, Viacom, and Samsung. Conglomerates prove that focus and diversity are not always mutually exclusive.

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140 PART 2 • STRATEGY FORMULATION

• When an organization has both the capital and human resources needed to manage the new business of distributing its own products.