Bergerac Systems: The Challenge of Backward

Integration
Abstract
Veterinary expenditure has been on an increasing trend due to the increase in pet ownership in the United
States. Bergerac is a company producing equipments used for testing pet patients in the veterinarian
clinics. Omnivue is one of the most successful equipments produced by the company, which is priced at a
competitive rate to attract lower and middle sized veterinarians. The production of Omnivue involves the
use of plastics and chemical reagents supplied by two major suppliers, GenieTech and Elsinore. The
management of Bergerac is planning to take control over its suppliers to reduce the production fluctuation
and overhead costs of the firm. There are three strategic alternatives for the company to implement its
future plans. It can opt for forward integration strategy by controlling its distribution channels; it can
implement backward integration strategy through acquisition of building its own plant. Bergerac also have
the option to operate the way it is currently operating to avoid risks arising from forward and backward
integration.

Introduction and Problem Identification

Bergerac systems, established in 2001, focused on developing latest medical
assistance machines for pets. As the trend of pet keeping and caring was
increasing, Company took advantage of the moment and started to invest in
research and development for a better substitute to the normal blood testing
machines at veterinary clinics. Pet healthcare industry grew at a rate of 7 to 8
percent due to an increase in the pet possession rate. A number of pet owners in
the United States consider their pets to be a family member and spend a decent
amount of their earnings on the pet healthcare. Veterinary doctors have been
focusing on clinical diagnostic and are relying on the latest machines providing
accurate and fast results. Omnivue was one of the latest additions to the pet
healthcare industry. A tabletop sized machine attracted professionals of the industry
through its unique features such as low price, fast results, simple operating
procedure and compact size. Omnivue was used by putting a small sample of blood
in an animal specific cartridge, and the test was completed in a time span of ten
minutes. The cartridges were made by Bergerac systems using plastic as the basic
manufacturing material.

Chemical reagents were sourced from multiple companies such as GenieTech

plastics and Elsinore limited. Due to an increased demand of Omnivue, the demand
of chemical reagents also increased and Bergerac faced difficulty when the
suppliers went short of the supplies. Bergerac has to move towards vertical
integration to meet the growing demand of their products without facing production
fluctuation.

Strategic Alternative 1- Forward Integration

A forward integration is a type of vertical integration whereby a company expands
its operations in order to take command of the dispersion of its products in the
market. It is done by controlling channels of distribution and managing supply chain
to maximize market share and profitability. Forward integration eliminates the
existence of a middle man in the supply chain process and allows the company to
sell its products directly to the final consumer. Companies have been focusing on
their immediate customer i.e. wholesaler, and their immediate supplier, reducing
the chances of the end consumer satisfaction.
Bergerac can opt for forward integration to control the market and satisfy the end
customer with promised product quality. Advantages of this strategy include
reduction in the number of supply channels and sale of the product at a competitive
price. Bergerac can attain a greater control over the distribution of Omnivue, and it
can reduce its price to attract small and middle sized veterinarians. However, the
control of distribution channels should not affect the manufacturing process at any
cost. The lack of experience in the distribution area can affect the sale of Omnivue
in a negative way. Inventory handling and the expansion of storage facility are an
additional

cost

of

opting

for

the

strategy

of

forward

integration.

Hence,

manufacturing department should not interfere in the distribution department, and

the latter should be experienced in distribution of products like Omnivue to the end
customers.

Strategic Alternative 2- Backward Integration

Backward integration is a type of vertical integration in which a company takes
control over its suppliers. It is a form of acquisition of the intermediary players
2

involved in supplying the raw materials used in the production process of the firm.
Raw materials, intermediate manufacturing and assembly are controlled by the firm
whereas distribution to the end customer is done by a third party company. In this
way, company increases production efficiency and gains a competitive advantage
by lowering its production cost.
Bergerac can opt for the buy option and implement its backward integration by
acquiring GenieTech. GenieTech can provide the company with eight efficient
molding machines for the acquisition price of $ 5.75 million. The price includes
experienced labor force and management. Bergerac can fulfill its chemical reagent
demand by using 4 out of 8 moulds provided in the acquisition. Rest of the presses
can be used in the expansion process or can be used to meet the demand of a third
party. This investment can result in the reduction of overhead expenses by twenty
six percent per unit. Bergerac can pay the amount over a period of five years
making the project feasible for the company.
Vertical integration can also be achieved by making the chemical reagents at
Bergeracs own plant located at Parsippany. GenieTechs acquisition would provide 8
molding presses exceeding the requirement of the company by 4 presses. Contrary
to that, Bergerac can attain its own presses and achieve greater efficiency and
productivity through proper training of labor and management of the plant.

Strategic Alternative 3- No Integration

In a No-Integration scenario, a company only takes control of its assembly, and it
outsources the supply of its raw materials and intermediate manufacturing. After
assembling the product and finalizing it, the company lets its distributors do the rest
of the supply chain management. End customer gets the final product through the
wholesaler or retailer. There is no direct contact of the manufacturer and the end
customer.
Bergarac can operate the way it is handling the production of Omnivue and avoid
any issues regarding capacity building and supervision of supplies and distribution.
The company can continue receiving the chemical reagent supplies from GenieTech
and Elsinore, and focus on the production of innovative veterinarian equipments

such as Omnivue. It can direct the potential investment into research and
development to maintain a competitive advantage in the market. However,
Bergerac can face the shortage of supplies as it faced in the past due to production
issues from the supplier side. It can also lose the authority to lower price of the
products due to a number of overhead and transportation expenses.

Recommended Action Plan

Bergerac is recommended to implement a backward strategy and control the supply
of chemical reagents by starting the production at Parsippany production plant. The
plastic components can be manufactured using four molding presses which will cost
less than the acquisition of GenieTech. The company could buy latest machines with
greater efficiency and production speed as compared to that offered by GenieTech.
This alternative would reduce the cost of a single unit of cartridge by 43 cents; thus,
allowing Bergerac to invest a greater amount of funds in its research and
development program. It can also reduce the price of Omnivue and be a market
leader in the veterinarian medical equipment market. However, it should be noted
that building a new plant would require a high initial investment. Training of new
staff and management would require further investment and time of the company.
The payback of this investment would be 1.3 years and profitability would increase
substantially after that time.
Building option is better than buying option, forward integration and no integration
as it is the only way to increase the control of Bergerac over its suppliers in an
effective and efficient manner. It will not only increase the assets of the company
but also enable it to build a customized production plant according to its
specifications. It can also opt for the modification of plant in future as to deal with
the increasing demand of Omnivue and anticipation of its future models.