To: Mr. Ron Assaf
Re: Backwards Vertical Integration of Sensormatic
Sensormatic Electronics Corporation should utilize the backwards vertical integration strategy. If Sensormatic vertically integrates backwards, they will have a competitive advantage over its competitors, such as Knogo, Checkpoint Systems, and 3M, which is a fit that is difficult to emulate. Backwards vertical integration is when a firm has a large amount of control over its supply systems, which leads to an elimination of the “middleman.” Due to the efficiency of backwards vertical integration and lower costs of production, a firm is able to be more competitive in the marketplace. By bringing both sides ...view middle of the document...
Backward integration reduces dependency on suppliers, while still allowing Sensormatic to outsource some of their raw material needs from companies like Artek Plastics.
Purchasing Canon will allow Sensormatic to gain competitive advantage because it will eliminate supplier power. They will also have a cost advantage by producing their tags at a lower-per-unit cost compared to the competitors because the competitors buy clips and straps at a market price of $.0507 per unit. The company will also gain better learning opportunities to create disposable tags. Furthermore, backward integration will solve the issue of inconsistent supplies.
3) Quantitative Evidence to Support Canon Acquisition Decision
Although the “Memorandum for Plastic Parts Production” prepared by Blakey (Exhibit 5, Case) shows that the In-House option has the lowest per unit cost of $.0458, this analysis is incorrect. The analysis assumes a constant demand throughout the next five years (starting from 1980). This assumption is not accurate; the case states that the demand will increase by 30% annually. Although the CEO states that Sensormatic only needs 4 molding presses to meet current demand, as demand increases, the need for more molding presses will increase as well. Using the constant growth rate of 30% annually, we calculated the demand for the...