Disintegration Strategies In The Brazilian Polymer Industry

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Vertical integration: is the combination of technologically distinct economic processes within a single firm. It represents the extent to which a company relies on in-house transactions rather than on the Market with respect to production, distribution, selling, research etc. A firm that produces its own raw materials, that owns its sales force or sells through a proprietary distribution network are examples of integration. Vertical integration require complex analysis, huge amounts of investment and it is very hard to reverse, it is therefore a very risky decision. Some of the costs that have to be taken into account are (Porter 1982):

- Overcome barriers to entry: integration is comparable to the entry in a new market; after all, you still have to overcome barriers such as scale, differentiation, capital requirement and proprietary technologies.

- Loss of flexibility: in terms of increased fixed costs and leverage, in terms of production capacity to maintain balance between each stage, reduced flexibility to change partners and foreclosure of technology and innovation coming from suppliers or customers. In other word the company can only rely on itself as a driving force for innovation and the development of new technologies.

- Capital investment: Vertical integration requires high amounts of capital to deal with investments, whereas dealing with independent companies uses outsider investment capital .

- Dulled incentives: in an integrated company there is a natural push towards complacency, motivated by the fact that everything produced by upstream businesses is going to be sold in- house instead of in a competitive market.

However, there are some relevant benefits that can be achieved through integration (Porter 1982):

- Economies of integration: if the scale is sufficient and the necessary critical volume is achieved, the company can benefit from a series of economies. List and describe economies

- Assurance of supply and access of distribution channels: by buying an upstream unit you eliminate any supply risk and bargaining power from the previous supplier. The same can be said about forward integration, proprietary distribution channels remove any bargaining power of distributors and allow for a higher price platform.

- Enhanced differentiation: Achievable through tight control of the processes and development of proprietary knowledge. The verticalized company can increase the value and differentiation of a product, increasing its quality and performance. Forward verticalization can also enhance differentiation, proprietary distribution channels and sales force can in fact add value to the product and service.

- Create barriers to entry: the above benefits, if achieved, give the company a considerable competitive advantage in

the form of, higher prices, lower costs, or lower risks. Each one of the benefits will generate barriers to entry, capital investment, proprietary knowledge, exclusive supply etc.

Vertical disintegration: Is the exact opposite phenomena, by which companies sell steps of the production process creating different companies, each one responsible for a part of production.

Quasi-Integration: is the situation in which a company establishes a relationship with a vertically integrated business without going for a full ownership status, reaching a position in between long-term contracts and full ownership. The most common are in the form of, minority equity investment, exclusive dealing agreements, specialized assets and facilities, long term contracts and joint ventures. Quasi-integration should be considered as an alternative to full integration, in some circumstances it can, in fact reach some of the benefits and reduce some of the transaction costs of the free market approach and cost/risk of vertical ownership.

Vertical integration and quasi-integration can bring a series of cost reductions however, it is possible to achieve substantial benefits with a more flexible and less risky structure. Examples of this are the long-term contract and the tapered integration. The first refers to a contract that locks out two independent entities with respect to some transaction whereas the second is the situation in which the company relies on integrated units for just a small part of its economic processes (the rest is done in the open market). All levels of integration have their pros and cons, the real challenge is to choose and adapt them according to the needs of the company and characteristics of the market.

1 Internal analysis: Mazzaferro Group

1.1 Historical milestones

The Company was established in 1953 in São Paulo (Brasil) based on the initiative of 4 Italian entrepreneurs, Nello Mazzaferro, Mario Mazzaferro, Massimo Ballardini and Pier Luigi Como. In the early stages , the business was based on bulk fishing line imports from Europe personally transported to Brasil, locally wound in smaller spools and then sold to local fishing stores. However, the importing process was complex and extremely time consuming. This fact, along with increases in demand for fishing products led Nello Mazzaferro and the other partners to develop a new strategy in 1957:

Commence extrusion of nylon lines in Brazil produced under a licence contract with EMSER AG Switzerland which at that time was also the supplier of raw material (Nylon 6). From that year on, the Company followed a natural course towards the verticalization of its technology introducing later on in the local production of Nylon 6 raw material (produced under Noy Engineering – Italy license from local supply of petroleum refining derived Caprolactam). Further investments down the chain of Nylon 6 transformation were later on made with new plants for monofilaments, fibres, nets, ropes, twines and household products.

’60 -‘70: The completion of the Technopolymers Plant in São Bernardo (1963) determined the definitive independence from EMSER AG. and the search for new opportunities. This period was marked by strong innovations especially in the development of new copolymers and nylon formulas to expand the activities from the mono and multifilament markets to engineering plastics and industrial applications. In 1978 another industrial plant was established in Diadema for the production of high tenacity Polipropilene yarns for ropes. New techology from Liba-Germany was introduced for braided knotless nets for fishing and farming and from Herzog-Germany for braided polypropylene and Nylon ropes.

’80-’90: Following the expansion of of nylon application uses, the Group diversified strongly its activities establishing