Asli Sdn Bhd (ASB) is an established family owned company which produces coconut milk

that is authentic, hygienic and ready-to-use. ASB is labell

ed as the "Coconut Milk Expert" for

its growing dominance in the industry. Urbanisation and growing affluence have resulted in

increased consumers demand in ready-to-use coconut milk or coconut cream powder. ASB

was quick to seize the opportunity to supply coconut milk to meet the growing demand which

eventually enabled the company to capture about 45% of the local market share. Tanjung

Mas Sdn Bhd (TMSB), ASB's close competitor netted

30% of coconut milk market supply.

Meanwhile, small coconut milk producers supply the remaining 25% of the market.

Given the recent growth of the industry and to further establish its presence in the local market,

ASB acquired TMSB without undertaking any due diligence process. Hashim, the Chief

Executive Officer (CEO) of ASB decided to acquire TMSB due to its diverse product offerings

which included several new coconuts based products such as virgin coconut oil, coconut ice-

cream, coconut puddings, coconut sugar, coconut flour and coconut butter.

The acquisition

of its close competitor (TMSB) has increased

ASB's

market share to 75%. The increased

business size enabled ASB to achieve synergy through market power. At the same time, ASB

also acquired Gagah Plantation (GP), the main coconut supplier. GP is a coconut plantation

company which has been in operation for over 20 years. ASB acquired GP with the aim to

lower the company's cost of production

, ensure regular supplies, improve efficiency and to

control the quality of coconut supply. The vertical integration took place when GP was in the

midst of restructuring its business. ASB had paid a premium to acquire GP. Hashim is confident that the acquisition of GP anda TMSB would ensure ASB's control over it's industri 's value chain, enjoy economic of scale and increase business profit.

ASB founder, Kamal however was not in favour of the acquisition of TMSB and GP. he prefers the CEO to take up one action at a time, as well as conduct a thorough investigation and due diligence process. On the contrary, the CEO feels that it wad a brilliant opportunity for the company to pursue delayed diversification as he is confident that the risk of acquisition will be low.

Required:

a) explain two risk ASB may face from vertical integration.

b) discuss two benefits from economies of scope gaun boy ASB through their related diversification.

c) advise 3 potential drawbacks of the acquisition activity that ASB may face.