advantages of backward integration for packages
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Whenever we talk about management, the first thing that comes in mind is conventional definition as to manage is to forecast, to plan, to organize and to control or getting work done through others but when we talk about strategy three thing came in mind which is competitive, linked with external environment and sustainability. Strategy is a competitive moves and business approaches to produce successful performance. Through management goals can be achieved but not efficiently. Combining both the strategic and management, we find a new combination i.e Strategic Management which is the set of managerial decisions and actions that determines the long run performance of a corporation. It is the game plan for running the business, strengthening firm's competitive positions, satisfying customers and achieving performance targets.
Specially students like we fresh people who are about to complete MBA whenever thinks of a business we always considered these theoretical concepts which helps us not only for the survival and growth but to have a sustainable competitive advantage. In this course of strategic management, the study of different strategies that are developed according to vision and mission statement of different companies helps us to come closer of brain behind corporate dynamics and allow us to think exactly similar as in professional corporate world thinks to have a sustainable competitive advantage over rivals. The topic that has been assigned to us is all about backward integration which is a part of vertical integration that is usually done because of more control, decrease dependency, cost edge and confidence on quality assurance. This project helps us to get knowledge of corporate sector in which we are about to enter.
World is globalized and globalization means barrier less market as sitting in one part of world one can order and purchase a product from another part of world. In this fast and great technological era the competition becomes more and more strong. For this every keen business man and strategy maker needs to take a move which needs to be smart.
As none of the industry can work in isolation, for running a successful business there is always a need of understanding external and internal situation and after having a thorough analysis, one needs to set strategy for managing a business for not only survival but also for growth. In order to understand backward integration we need to understand vertical integration first.
In vertical integration either company becomes its own supplier or distributor and measure taken in between supply of raw material and sales as to have a more control, less dependability which helps in competitive advantage. There are three types of Vertical Integration are discussed below:
It is the form of vertical integration in which a company becomes its own supplier and having a more control of the supply of raw material of its products to have a competitive advantage. It is attempt of reducing supplier power and thus reducing input costs and lower its dependability on suppliers.
P & G's Tide displayed in Wall Mart but later Wall Mart produce its own detergent through backward integration that forces P & G's Tide to reduce prices by 20 % to 25 %.
It is the form of vertical integration in which a company become its own seller and having a more control of the direct distribution of its products to have a competitive advantage.
Previously Gul Ahmed produces Cloths and now Gul Ahmed open its own outlets with the name of Gul Ahmed Idea and sell directly to clients.
Horizontal integration refers to addition of same kind of business in the existing business in order to increase production, market share and to reduce competition. It is generally done by acquisition of competitors, merger with existing firms or by setting up new plants.
If your company is working two shifts a day and third is empty, your competitor of manufacturing same product have deficit of manufacturing according to his demand and you allow your competitor to use your facility for their manufacturing to fill their need and against that you charge rent to your competitor accordingly, it is horizontal integration. The other example is that you give your warehouse to competitor. Example of dying machine use in textile sector can be another example of horizontal integration.
1. If we take from supplier perspective, may be the quality is not assure according to your standards but after vertical integration, one is assure of quality for what he is delivering to customers.
Reduces the dependency on suppliers and be more convenient.
Cost reduction as compare to competitors.
The main disadvantage is expertise spreads thinly i.e attention divides from core competency. Vertical Integration requires an investment, time and energy for either usage of backward or forward integration, in this way the attention needs to be divided and for this competitor might take advantage.
Increase business risk as with involvement into another business, risk factor is also increased.
According to Author Thompson and Strickland in Strategic Management (thirteenth edition), vertical integration increases the firms competitive capability within same industry. It increases the value chain ability of a company as starting from procurement till its distribution and selling, the level of activities and control increases. The main advantage according to author is strengthening of a firm's competitive position. As a company previously outsourcing its activities now having a in house production facility through backward integration increases the better quality products. It also reflects the decrease in dependency as previously supplier increases its prices in any opportunity, but after integration dependency is reduced to greater extent. The main disadvantage of backward integration is its lock of a firm's deeper into industry and later find out that outsourcing was more cheaper and better . With the expansion of a firm and capital investment, risk exposure of business also increases. It also distorts from core competency of a firm.
According to source of Author Friedrich Kessler and Richard H. Stern, the main reason for backward integration is cost saving as in different processes starting from procurement to selling and distribution because of integration not only the cost is reduced but also the control increases on prices so that of saving or profit. Backward integration also helps to have a confidence on quality as after getting more on our supplies through backward integration the level of quality uniformity is also increased. It also helps in greater level of flexibility in operations.
Paper and Packaging Industry Analysis:
When Pakistan came into being there was not any paper and board manufacturing unit was formed at that time the only place where the demand is fulfilled was importing from other countries. In 1952 the first paper unit was formed with the capacity of 400 to 500 tons per annum as with the passage of time other manufacturing units of paper and board were formed in different parts of Pakistan which Sindh and Punjab. Most of the mills have the capacity of 1500-88000 tons on annual basis.
If we see today more 100 of paper mills are in operational capacity of more than 600 thousand tons per annum, and it not only offer a simple package paper but also wide variety of boards and printing material.
It is the fact that Punjab is having a largest number of paper mills and contributes more than 65 % of all paper manufacturing unit as Punjab is considered as having excess availability of wheat straw and river grass which is used as raw material for paper manufacturing whereas Sindh is having 15 to 20 % of paper mills.
As capacity of paper manufacturing increases which highly affect the import of paper from fall of 64,000 tons per annum to 17,000 tons. It has been also found that the duty on paer is increased from PKR 17,000/= per ton to PKR 26,000/= per ton.
Few known companies that operates in Pakistan are as follows.
Century paper mill Pakistan
Premier Paper mill
Lasani Paper and Board Mills.
West Pakistan P.I.D.C concept mill. Rahwali
Textile Industry Analysis
Pakistan is an agricultural country and the main crops include wheat, rice and cotton. The production of cotton on a major scale was the driving force for emergence of textile sector as the important part of manufacturing sector. Textile is now considered as the back bone of the country's exports. There are many challenges faced by the sector in terms of electricity shortages, gas load shedding and raw material and labor costs. Progressing in the manufacturing industry and to achieve sustainable competitive advantage textile sector has to come up with some efficient technology, skilled labor force, quality raw material and smooth flow of operations. The need for vertical integration arises from the fact that the raw material needed for production is not of the required quality and specifications.
The continuous growth in textile sector and increasing demand in the foreign market has made the sector to form strategies that would lead to a sustainable competitive advantage over the other countries products. During the current fiscal year the exports of textile has increased by 26%. The rising price of cotton has made a exponential increase in the profits of the textile sector with a growth 183% as compared last year. Garment industries have also contributed and the growth in the exports has been 23% in the current fiscal year.
Textile sector is mainly divided into following segments
Spinning: 1.55 billion KGs of yarn
Weaving: 4.368 billion.metre2 of Fabric
Finishing: 4 billion.meter2
In addition to this textile sector also comprises of garment, knitwear and towel units which produce 670, 400 and 53 million KGs respectively.
Contribution of textile sector in the manufacturing industry is vital as there are around 1225 units of ginning, 442 units of spinning are in operation. The weaving segment comprises of 570 small and large units and 20600power looms. There are around 2550, 600and 400 units of garments, knitwear and towel production respectively.
Textile sector being the largest contributor to exports holds 54% of the total exports of Pakistan which is equal to 5.16 billion US dollars.
Textile industry as part of manufacturing sector contributes around 46% of the total manufacturing in the country.
Employment is a very critical issue in the developing countries like Pakistan. The contribution of textile sector in making the people of Pakistan employed is 38% of the labor force
Gross domestic product is the economic measure for performance of a country's growth. Textile sector contributes 8.5% of the total GDP of Pakistan which is a critical in the growth of Pakistan.
The growing demand of Pakistani textile products is a competitive edge over other competitors and to cope up with it textile sector has to develop strategies of effectively achieve the quality and product specifications. Vertical integration is an important arena to be pursued in order to create uniformity in the products, reduction of the cost and convenience of approach.
Packages Limited is established is a joint venture between the Ali Group of Pakistan and Akerlund and Rausing of Sweden and is established in 1956. It has sales of over US $ 100 million in 2004. Its customer includes big giant companies such as Unilever and Pakistan Tobacco Company. It is listed on all three stock exchanges in Pakistan, Packages Limited has maintained a long-time credit rating of AA. Initially packages works for cigarette, tea, soap and pharmaceutical industry products but its quality was only satisfactory but with the time packages not only increases and expanding its facility but also increases the quality of their product and today packages is also considered as monopolistic in Packaging industry and satisfy a major percentage of packaging company needs.
Packages is also renowned in its field and now exporting its managerial skills and expertise to countries like Saudi Arabia, Tanzania, Somalia, Nigeria, Kuwait, Indonesia & Russia.
It has also started the export of tissues to Maldives, Iran, Sri Lanka, Indonesia, United Arab Emirates and Bangladesh. Packages Limited has a workshop which works on large scale and is capable of not only making but also repairing parts. Its plant is also furnished with Research and Development department which ensure and maintain its quality. Currently about 2500 employees are working in the company. Today packaging is considered as a leader where variety of product's Packaging facility is operational under one roof.
Packages always tries its best to work for new innovative packaging research and also pioneered several innovations, including the use of wheat straw as a raw material for paper and board manufacture. Its on-site paper and board mill, established in 1968, has constantly increased its production capacity.
Packages Limited production units are divided into five categories, are as follows.
Paper & Board
Carton Business Unit
Corruwal Business unit
Flexible Business Unit
Paper & Board:
Packages are producing paper and board of very good quality from 1956 and always took care of
Environment friendly manufacturing processes. Packages specialize in making a variety of duplex boards and paper. Its products are known for high performance in terms of durability and gloss.
â€¢ High gloss writing paper
â€¢ Wood-free writing/printing paper
â€¢ Machine glazed / special poster paper
â€¢ Liner for shipping cartons
â€¢ Corrugating medium paper
â€¢ Fluting paper
Packages manufacture several types of board. Tetra Pak Limited is manufacturing food board since 1979 which is used as a raw material in liquid packaging.
Some of Packages board products are:
â€¢ Liquid packaging board
â€¢ Liner board
â€¢ Duplex board / chipboard
â€¢ Bleached board
â€¢ Tobacco board and cardboard
â€¢ Food grade board
Carton Business Unit:
Carton business unit is considered as one of the vital part of manufacturing and operations at Packages. With the help of continuous up gradation in technology, packages control on every step of manufacturing process. Company's consideration on superior quality goods is proven by its customers.
The total board consumption of the carton line is around 18 - 20 thousand tons per annum. The strong backward integration within the Packages value chain has given the competitive edge in terms of cost, convenience and low risk exposure. With the help of backward integration not only ensure material availability but also save turnaround time and promised delivery.
3. Corruwal Business Units:
Since 1974, Packages is manufacturing corrugated cartons and produces in different sizes with also a value addition of strong distribution network and exporting to other countries also. Packages always encouraged product development and spent a lot on R & D.
Corrugated cartons is one of the important portfolio for the packages and its manufacturing facility is producing with a capability of seven million corrugated cartons to meet its customer's demand.
4.Flexible Business Units:
Packages also considered the demand of flexible packaging with changing trends and needs. It offers flexible line makes high quality packaging films and laminates, and offers other specialized services such as rotogravure printing and sleeve-making.
Flexible packaging offer with different plastic film, aluminum foil and paper to produce laminates of two or more layers for providing layered protection against moisture, gases and odors. These type of packaging is considered as important in food and pharmaceutical industries.
5. Consumer Products:
Packages also considered and take care of routine life problems and needs, offer variety of products like below and make life easy.
1. Tissue Products
2. Personal Hygiene
3. Paper Product
Our brands of Rose Petal and Tulip holds more than 75% of market share in tissue industry of Pakistan. Packages along with offering tissues, also offered custom-printed boxes, table napkins, coasters and paper cups to institutions such as hotels, fast food chains, restaurants, businesses and the airline industry. As Packages always considered and come up with innovative ideas and on customer expectations.
Backward Integration Perspective:
In 1968, Packages formed its own paper mill with production capacity of 24,000 tonnes as paper mill produced paper from waste paper and agricultural by-products like wheat straw and river grass. With increasing demand, packages considered and increased its capacity from 24,000 to 100,000 in 2003.
Packages Limited setup a new pulp and paper mill project in 2005 at Kasur located, 50 km south of Lahore. The green field site spread on 42 hectares is known as Bulleh Shah Paper Mill coined after a famous Pakistani poet from this region.
The green field site comprises of two modern paper machines PM6 and PM7 that will enable us to increase our paper and paperboard production from 100,000 to 300,000 tones per year. Because of Bulleh Shah Paper mill it helps in increasing capability.
Advantages of Backward Integration for Packages:
It helps to reduce the dependency of suppliers and increases convenience as if the supplier did not supply on time which is a common problem than not only loss of profit but also company's image is affected.
It helps to have a competitive edge because of their reduce production cost, low pricing strategy and so that more profit.
It helps to have a confidence on quality uniformity and assurance because previously it was taking material from different supplier with variation in quality but now since they themselves is operating, this increases the confidence on quality.
Disadvantages of Backward Integration for Packages:
Supervision and expertise stressed as now after backward integration attention is divided.
Increase Business Risk of a change of technology so it needs to be updated with proper maintenance.
The opportunity cost for investing in Bulleh Shah Project is that they might invest in new product line and struct up in huge investment
Secret of Success:
Packages have huge market share in Pakistan and have monopoly in terms of packaging, new entrant might need to invest a lot to compete. Packages but it will take time to establish the name as Packages operate from 1956 and off course its backward integration helps a lot in terms of cost saving, convenience and quality assurance. There is no competitor which provides exactly similar product line as Packages offer but some competitors are there with specific products as Metatex (in flexible packaging), Ehtisham brother (in carton and corruwal), Saima Co. (in flexible product line). As this firm offers a wide variety of packaging to their clients under one roof so that it increases convenience.
Merit Packaging Ltd.
As we know that there are so many printing and packaging industries in Pakistan but Merit Packaging Ltd. is a very famous and top class printing and packaging company in Pakistan which is successfully working since last three decades. Merit Packaging Ltd. is under umbrella of Lakson group of companies which is a very renowned business group in Pakistan. Mr. Iqbal Ali Lakhani is Chief Executive Officer (CEO) of Merit Packaging Ltd. The company is catering offset printing and flexible printing requirements of the customers and also provides POS material. It is an ISO certified and a public limited company which have more than 200 employees who are not only professional and skilled but also dedicated to their work.
At initial stage Merit Packaging Ltd. buy all the raw materials from different suppliers and traders. But after few years when their demand increases and suppliers were not able to fulfill their need then they planned to do backward integration for manufacturing paper which is highly consumable in packaging industry. They started manufacturing of paper in 1984 with the name of "Century Paper and Board Mills" which is the largest paper and board mill in Pakistan.
To apply our expertise in printing and packaging and creating value for our customers and at the same time upholding the highest standards of quality.
Our vision is to become the preferred company of choice when it comes to offset and Flexible printing and packaging solutions.
Merit Packaging provides pre-printing service facilities to its client. This department is equipped with Macintosh and advanced computers which have high class and up to date professional designing software operated by professional and experienced employees. This department works on making creative designs, improvements of existing designs and making designs according to the customer's specifications and requirements. Pre-printing press department also prepare final CD for production process.
Merit Packaging Ltd. has printing machines for offset printing and gravure printing in multicolor. Offset printing machines are used to manufacture POS materials and folding cartons in six different colors and coating options according to the customer requirements.
Rotogravure printing machines are used in the production of larger orders for paper and film. This machine has facilities to print up to 8 different colors in a single stage.
Merit Packaging Ltd. has high speed automatic cutting and creasing machines which are used for folding cartons and as well as for POS material. Stamping facilities on carton is also available in the company. Flat printed cartons are manufactured on filling machines provided by the customers for cigarettes and tea while gluing cartons are manufactured on high speed and electronically controlled gluing machines.
Merit Packaging Ltd. has a laboratory which is well equipped with all the apparatus required for testing. The laboratory is used to test the raw materials to ensure the consistency and quality of printing. Paper, board, inks and chemicals all are tested according to the set standards before production process so they cannot create any problem during production process. Laboratory and quality control department not only test the materials before production but also continuously check during production process.
Merit Packaging Ltd. has ISO 9000 certification which is a symbol of quality for products manufacturing by the company. The company is also working to get "Hazard Analysis and Critical Control Point" (HACCP) certification which will add more value to the company. Merit's quality policy totally focuses on customer's satisfaction and improvement of quality.
The Lakson family:
Merit Packaging Ltd. is under umbrella of Lakson Group of companies. This group started its operations in 1954. Till now Lakson group has started so many businesses in Pakistan and is one of the leading business group of the country. Lakson has $1 billion asset base and have more than 3000 employees. Following are companies headed by Lakson group in Pakistan.
Century Insurance Company Limited
Paper & Packaging:
Century Paper & Board Mill
Lakson business solutions
Tritex Cotton Mills Ltd.
Daily Express newspaper
Century Paper & Board Mills Limited
Century Paper and Board Mills Limited is one of the largest paper and board mill in Pakistan founded by Lakson group in 1984 as a result of backward integration for Merit Packaging Limited. Company is not only catering Merit Packaging Ltd. but also selling its products to many other reputable clients due to high productivity and well equipped manufacturing facilities. The company is dedicated to provide quality paper and board to its customers.
Century Paper and Board Mills Limited has a team of highly professional and experienced employees in which 60 engineers are dedicated for different departments. Currently more than 1600 skilled, experienced and well trained employees are working in the company to provide excellent and quality products to the customers.
The company has seven machines for making paper and board. In which PM-1, PM-4 & PM-7 machines are used in the production of board whereas PM-3 & PM-6 are used in the production of paper. These machines have 230000 tons/year rated capacity to manufacture board and paper. PM-7 is state of the art latest machine installed in 2008 to produce board which has capacity of 130000 tons per year. This machine is based on recycling of fibers which is environment friendly.
Century Paper & Board mills Ltd. also producing sheets which are used in manufacturing of corrugated boxes. Company has state of the art machines which have capacity of producing 30 million square meter sheets per year. Also company is producing various sizes of corrugated containers with a capacity of 60 million per year. The company is willing to double the production of corrugated containers.
Century paper & board mills limited have ISO 9001: 2000 and ISO 14001: 2004 certifications and also willing to get OHSAS 18000: 2008 certification
Secrets of success of Merit Packages:
The following are secrets of success of Merit Packages.
The company setup "Century Paper & Board Mills Limited" as a result of backward integration which is one of the main reasons of their success. Due to this integration the price of raw material is decreases and profitability increases.
Smooth supply of raw material, better control on quality and just in time delivery due to backward integration are also secret of their success.
Also this integration reduces the dependency on suppliers.
Merit Packages is headed by Lakson group which is one of the largest business group in Pakistan.
Due to its production capacity and well equipped machines it is largest printing and packaging company in Pakistan.
Merit Packages provides pre-printing facilities to the customers which is one of their secret of success.
Most of the renowned companies are clients of Merit Packages.
The company has ISO 9000 certification which is also a success factor.
Yunus Textile Mills Limited
Yunus Brothers started their business in 1962 from a small trading business of fabric and is now become one of the leading business group in Pakistan. This group has invested in cement, energy, textile and construction industries which has more than $750 million annual turnover.
Yunus Textile Mills is part of this group which was founded in 1998 in Karachi and in a very short period of time it is now Pakistan's largest textile exporter. Initially Yunus textile mills started manufacturing of bedding products and now it is also manufacturing home textile products. YTM is exporting its products to renowned retailers in Europe, France, USA, Canada, UK and Spain. The company
In order to fulfill the need of raw material and reduce dependency on suppliers, Yunus Textile mills recently setup a spinning mill which is an example of backward integration. This spinning mill was setup with an investment of $15 million.
Yunus Brothers Group has following industries besides Yunus Textile Mills Ltd.
Lucky Textile Mills
Lucky textile mills was founded in 1983 by Yunus Brothers which have state of the art weaving and stitching machines. Weaving unit has a fabric production capacity of 3400000 meters/ month. While stitching unit have capacity to stitch up to 1500000 meters/ year.
Fazal Textile Mills Limited
Fazal textile mills was founded in 1987 which is the largest spinning mill in Pakistan. This company has ISO - 9001:2000 certifications.
Gadoon Textile Mills Limited
Gadoon Textile Mills was founded in 1998 by Yunus Brothers Group. This company is producing core spun yarn which has 194392 spindles.
Lucky Energy (PVT) Limited
Lucky energy Limited was founded in 1993 which have 17.4 MW generation capacity. This company is used to provide electricity to Lucky and Fazal Textile mills.
Lucky Cement - Established in 1996
Lucky cement was founded in 1996 which is not only largest manufacturer but also largest exporter of cement in Pakistan. This company has production capacity of 25000 tons of cement per day.
Yunus Textile Mills is having following product range:
Beds & Comforters
Curtain & Draperies
Cushions & Pillows
Duvet Cover sets
Yunus textile mill has recently invested $15 million in setting up a plant of spinning in order to fulfill the supply needs. The reason for investing such an immense capital is to gain competitive advantage over the others in the same industry. Strengthening firm's competitive position is very critical in order to achieve long term sustainability and to operate on competitive edge.
Backward integration is the source to achieve differentiated competitive advantage in order to perform activities that could yield in a better product, quality of raw material, reduces inconvenience of supplies and desired specifications of raw material that when purchased can be much expensive.
The reason for which Yunus textile went into backward integration is to achieve economies of scale and to make its supplies smooth. By doing this it would be able to reduce the suppliers bargaining power and control over the supplies which are required for the manufacturing of final product.
Advantages of backward integration
Reduced cost in terms of supplies
Convenience in getting supplies on time and of desired specifications
Uniformity of raw material
Reduced reliance on suppliers
Increased bargaining power over suppliers
Disadvantages of backward integration
Increased level of operations in the value chain
Increased business risk
Capital invested is at stake
Although yunus brothers is a strong group and has been in the business of textiles from a long period but backward integration is a source of competitive advantage only when the economies of scale is achieved by adding an extra level of operation. The cost effectiveness is possible when the need for the next level of operation is met and with the quality that is desired.
Packages have huge market share in Pakistan and have monopoly in terms of packaging, new entrant might need to invest a lot to compete. Packages but it will take time to establish the name as Packages operate from 1956 and off course its backward integration helps a lot in terms of cost saving, convenience and quality assurance. Its Clients are also giant companies like Unilever and other Pharmaceutical and Tobacco Industries which enhance its image. There is no competitor which provides exactly similar product line as Packages offer but some competitors are there with specific products as Metatex (in flexible packaging), Ehtisham brother (in carton and corruwal), Saima Co. (in flexible product line). As this firm offers a wide variety of packaging to their clients under one roof so that it increases convenience. Packages because of its Bulleh Shah Project, increases its capacity. By doing investment more in Backward Integration, company locked up more deeply in to its field and as now this company is maintained with long-time credit rating of AA which also increases confidence.
Merit Packaging Ltd.
Merit Packages is headed by Lakson group which is one of the largest business groups in Pakistan. By doing backward integration the price of raw material is decreases and profitability increases. Smooth supply of raw material, better control on quality and just in time delivery due to backward integration are also secret of their success. Also this integration reduces the dependency on suppliers. It is reaping all the advantages of backward integration that helps this company to exist in business competition.
Yunus Textile Mills Limited
As Yunus Textile Mill started its business from 1962 and now yunus brothers is a strong group and has been in the business of textiles from a long period but backward integration is a source of competitive advantage only when the economies of scale is achieved by adding an extra level of operation. The cost effectiveness is possible when the need for the next level of operation is met and with the quality that is desired. By doing integration Yunus Textile Mill is getting advantage of cost saving, convenience and quality assurance that will help to achieve its long term strategic goals.
It is recommended that a company must go and avail opportunity of backward integration when it is established and mainly it is dependent on supplier, by taking the decision of backward integration may reap all the possible advantages of backward integration which is concerned about cost saving, convenience as it reduces dependency and more confidence on quality. Best strategy is a tailored fit of internal and external situations both as before entering in to integration and locked up into deep business and capital, strategist must analyze its future growth prospects.
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