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The Universal Group of Companies, a conglomerate of five firms based in Zamboanga City, is one of the country's largest producers of canned sardines. From its humble beginnings as a dried fish maker and retailer, it has become one of the country's most successful vertically integrated group of companies--meaning that it has effectively executed its strategy of controlling all stages of the production process, from raw material acquisition to the selling of its final products.

The group's core company, Universal Canning Inc. (UCI), started in 1994 and initially provided toll-packing services for local and international sardine brands, including the Master Sardines brand that is very popular in Metro Manila and Luzon. But by 1998, UCI came out with its own sardine product called Family's Brand, which emerged as the fastest-growing sardines brand in the country with a market share of 50 percent in Mindanao and 35 percent in the Visayas.

To increase its presence in the lucrative Luzon market, UCI decided in 2008 to buy the Master brand--which has been in existence since the 1980s--from its former toll-packing client, Bagong Buhay Industrial Corp. According to UCI managing director Dr. Leoncio Kaw Jr., it was part of a P500-million expansion plan that also saw Universal buy the sardine brands Atami and Mikado to strengthen its hold of the market in Mindanao, particularly in the cities of Davao and Cagayan de Oro where these two brands dominate.

Universal Canning had no problems supplying its growing market because its sister companies took care of the other phases of its sardine production:

• The Zamboanga Universal Fishing Corp., the largest deep-sea fishing company in Mindanao, caught the fish;
• The Universal Shipyard took care of maintaining the fishing fleet; 
• The Universal Ice Plant and Storage made sure the sardines stayed fresh before they went into the cans; and 
• The Southern Philippines Fishmeal Corp. took care of the fish entrails or waste by processing them into fishmeal and fish oil, which are used in other industries.

What's more, says Dr. Kaw, these companies served other firms besides Universal, thus generating additional income for the group.

In October 2008, Universal Canning also added a club canning line, a blast freezer and a cold storage facility--collectively worth P300 million--at its 3-hectare manufacturing plant in Barangay Ayala, Zamboanga City. This allowed the company to produce the flat club cans suitable for exporting sardines (round cans of sardines are used for local consumption) to the huge European market.

"These new facilities will achieve our company's dream to complete the integration of our sardines business," says Anita Lee Kaw, chairman and CEO of the Universal Group.

The vertical integration approach
When an entrepreneur's small company becomes successful and achieves scale, what can he or she do to grow and expand the business? For entrepreneurs in the manufacturing industry, vertical integration--accomplished in part by buying the business of their supplier, customer, or competitor--just might do the job.

Current examples of vertical integration are the major global oil industry companies, each of which commonly owns not only the oil wells and refines the oil but also sells gasoline and other petroleum products at roadside stations.

Vertical integration is a strategy common among larger corporations for gaining market share or dominating the market. A company does this by seeking to control all steps of its production process, from acquiring the raw materials to selling the final product.

In contrast to horizontal integration, where a company buys into or acquires other companies involved in the same part of the production process (in a bid to effectively reduce or eliminate its competition), vertical integration has a company involved in all the different production aspects.

There are three varieties of vertical integration: (1) backward or upstream, relating to a company's suppliers; (2) forward or downstream, with respect to a company's buyers; and (3) balanced integration, which involve both ends of the production process.

Cost and control are the two major issues that should be considered when deciding to vertically integrate, says Maurice Greaver, author of Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives.

Greaver says the cost aspect depends on the cost of market transactions between firms against the cost of administering the same activities internally within a single firm. The second issue, he adds, is the impact of asset control, which can affect barriers to entry and which can assure cooperation of key value-adding players.

Among the possible benefits of vertical integration, Greaver says, are:

• Reduced transportation costs and improved supply chain coordination
• Providing more opportunities to differentiate by means of increased control over inputs
• Captured upstream or downstream profit margins
• Increased entry barriers to potential competitors
• A lead to an expansion of core competencies.

Greaver says that while some of the benefits of vertical integration can be quite attractive to a firm, its drawbacks may negate any potential gains, like the following possible disadvantages, among others:

• Capacity-balancing issues. For example, the company may need to build excess upstream capacity to ensure that its downstream operations have sufficient supply under all demand conditions
• Potentially higher costs due to low efficiencies resulting from a lack of supplier competition;
• Decreased ability to increase product variety if significant in-house development is required
• Developing new core competencies may compromise existing competencies.

Overall, the concept of vertical integration can apply to small and medium enterprises depending on their available resources, according to Francisco P. Bernardo Jr., former dean and current professor emeritus at the Asian Institute of Management (AIM).

"In backward integration, instead of the entrepreneur procuring the finished products, he can buy the raw materials and subcontract the manufacturing process," says Prof. Bernardo, who also heads the Leading Entrepreneurs Towards Sensing Global Opportunities (Lets Go) Foundation.

In forward integration, Bernardo says the entrepreneur "can sell directly to end-users or consumers instead of selling to retailers." But what's clear, he adds, is that "backward and/or forward integrations are opportunities for expansion" a growing entrepreneur should explore.

Contact details:

UNIVERSAL CANNING INC.
Calle San Isidro, Barangay Ayala, Zamboanga City, Zamboanga del Sur
Telephone: (062) 991.3546