Upward and Downward Integration

[pic 1][pic 2]

[pic 3]

Executive Summary

        In this paper we look into the economic and strategic justification of Drom Firm in Iran under the name of “Tooska e khorasan Trading Company”. The vertical production chain graph in the Appendix displays the production steps performed by the Drom firm as well as distribution steps are done by Tooska Company.  

        As a sales staff in Tooska, I was heavily involved in the importing and distribution of Drom’s products in Iran, and had direct relationships with the Drom firm in Germany and customers in Iran. I was making decision about the processes which should be done in Germany by Drom, the ones that must be done in Iran by Tooska, and the  activities which should be done by the other companies to complete the chain was a strategic decision. Each step can have an important effect on the earning higher profits and claim a strong market position.  

Introduction

        It was official! I finally got the formal email from Drom Company in Germany which announced that Tooska was accepted as Drom’s exclusive distributor and agent in Iran.

        We had to start to develop business relationships with Drom as well as some other companies in Iran as supporters and customers. Tooska was and still is a well-established company in Iran’s fragrance market and had huge bargaining power in doing business with its customers. Moreover, Tooska had the level of professionalism and reliability that Drom and costumers needed. Drom was also a renowned firm in Europe which produced high quality fragrances.

Understanding the Business and Fragrance Market in Iran

Profitability reasons for entering Iran’s market and integrating with an Iranian company will explain what we need to understand the reasoning for Drom and Tooska to start this business relationship and integrate with each other:

1. Iran’s market is a large market which is not a complete competitive market. It means that as soon as one enter the market, can develop its business much easier compare to the other countries in Middle East region. But this market has its own rules and international firm cannot enter the market without integrating with an Iranian company.
2. Buyers don’t have much of a bargaining power, since there isn’t much option in the Iran’s fragrance market.
3. Tooska was one of the best options for Drom because they are one of the well known companies in fragrance market and they are very specialized. Also, Tooska has high rates of customer satisfaction and long term relationships with its clients which will reduce cost for Drom.
4.  Fragrances are usually used in hygienic and cosmetic industries which have their own specific provisions in Iran. It was costly and almost impossible for Drom to adjust itself with these changing provisions easily and quickly. So, integrating with an Iranian company was necessary.
5. There isn’t a domestic fragrance producer in Iran. All fragrances are imported by trading companies like Tooska. So, Tooska should establish a business relationship with a nondomestic firm to enlarge its business.      

        Considering mentioned situation and conditions, it was a win-win relationship for both Drom and Tooska to vertically integrate.          

Why Integration?

        As mentioned earlier if Drom wanted to develop a business in Iran, it was necessary for them to start a business relationship with an Iranian company. On the other hand, if Tooska wanted to expand its business in fragrance market in Iran, it needed to be integrated with a nondomestic firm. Integration seemed to be inevitable solution for both companies for the following four reasons: