Question

SITUATION:

Arwa and Rand are both businesswomen in Auh. Arwa is a textiles (cloth) trader and imports cloth from India and sells it to readymade garment manufacturers in the UAE. Rand owns a designer wear Kaftan making company in Auh. She buys cloth from Arwa at AED 50 per meter, uses 2 meters cloth for every Kaftan she makes [in her factory], and sells them at AED 1000 per Kaftan.

Jealous Arwa thinks: For every AED 100 that Rand pays me (per Kaftan) she makes 900. I am her only supplier, and have 2 choices: (i) I must increase my price to AED 300 per meter, or (ii) open a factory and start making / selling Kaftans myself, and make AED 1000 per Kaftan. Also, this way, I will be my own supplier! However, getting a license to enter Rand’s type of business is extremely difficult. Too many government regulations, and very few licenses.

Crooked Rand thinks: (i) What if Arwa becomes greedy and increases her selling price suddenly? There are no other local suppliers. Since I have plenty of cash in the bank, why don’t I set up my own textile trading company, import my own cloth, and stop depending on Arwa? Getting a trade license to import textiles is very easy, it takes just 1 week. Anyone can get into Arwa’s low-profit business.

QUESTION:

In strategic management terminology, what are the points, or thoughts that are passing through Arwa’s and Rand’s minds? Provide your answer below their names:

i) Terminologies for Arwa’s thoughts/points:

ii) Terminologies for Rand’s thoughts/points

Answer 1

(i) Arwa is thinking of a form of vertical takeover that is forward integration. This is vertical integration of her business with Rand's business so that she not only remains a textiles (cloth) trader but also becomes a designer wear readymade garment manufacturer. This means she'll control the distribution of the products and not merely be in the B2B (Business to business) segment.

(ii) Rand is also thinking of a form of vertical takeover but a backward integration. This type of vertical integration means in addition to her busines she will also expand into becoming a textiles (cloth) trader. This means she'll now have control of her supply chain.