Question

1. Why do companies want to vertically integrate in order to control assets or inputs that are specialized to a particular transaction?

2. An airline company is considering backward integration into oil refinery to avoid high fluctuations in petroleum price. The argument has been made in favor of vertical integration: “Airplane that operates at full capacity is more efficiently used and lead to much lower cost per unit than an airplane that operates at less than full capacity. Owning our own source of petroleum insulates us from short-run supply-demand imbalances and therefore will give us a competitive advantage over rival airline companies.” Do you agree with this argument? Why?

3. Is a firm size determining factor in the vertical integration decision? That is, are large firms more likely to outsource production of inputs than are small firms? Why?

4. Do firms adopting related diversification strategy necessarily produce similar products? Thoroughly justify your argument.

5. A large American bank conducted an analysis of the external environment and reached the conclusion that 3D Printing & Rapid Prototyping Services is one of the fastest growing businesses. The bank decided to diversify into the 3D Printing & Rapid Prototyping Services through the acquisition of America’s biggest 3D Printing & Rapid Prototyping Services company. In justifying and defending this diversification move, the CEO of the bank argued that this diversification would help his financial institution and the 3D Printing & Rapid Prototyping Services company achieves several operational economies of scope? Do you agree with the reasoning that the CEO used to justify the diversification? Why?

6. Ale-8-One, known colloquially as Ale-8, is a regional ginger and citrus flavored soft drink, bottled by the Ale-8-One Bottling Company, a family-owned enterprise in the small town of Winchester, Kentucky, near Lexington, where the beverage is especially popular. Do online research on this company. Discuss the company business level strategy? What is the company corporate level strategy? What is the type of corporate of diversification that the company follows? You must justify and explain your answers.

Answer 1

Why do companies want to vertically integrate in order to control assets or inputs that are specialized to a particular transaction?

Vertical and Horizontal integration are the strategies used by various businesses.

In the Horizontal integration, a company takes over the same kind of businesses from the external business environment.

At the same time, in the vertical integration a company expand their business operations in the existing business value chain.

Most of the companies are doing vertical integration, because, it has various advantages comparing with other integration strategies.

Advantages of vertical integration :

• Strengthening their supply chain
• Reducing production cost
• Reducing Transportation cost
• Common ownership helps for proper maintenance
• Capturing profits
• Accessing new distribution channels
• Increases profits
• Guaranties efficiencies in the production process
• cuts downs on delays on delivery and transportation.

The above are the reasons why companies choosing vertical integration in order to control the assets and inputs.

An airline company is considering backward integration into oil refinery to avoid high fluctuations in petroleum price. The argument has been made in favor of vertical integration: “Airplane that operates at full capacity is more efficiently used and lead to much lower cost per unit than an airplane that operates at less than full capacity. Owning our own source of petroleum insulates us from short-run supply-demand imbalances and therefore will give us a competitive advantage over rival airline companies.”

Do you agree with this argument? Why?

Yes. I agree with this statement. Because, it is always better to reduce outsourcing of the materials in order to effectively maintain the cost and expenditure.

Here, an airline company is planning for backward integration into oil refinery to avoid high fluctuations in petroleum price. In both short term and long term this idea will help to this company for standing out from the industry competitiveness.

Advantages of backward integration:

This always has various advantages. They are listed below,

• Better control over the productivity
• By acquiring the oil refinery unit the company will have greater control over the supply chain process from the manufacturing of raw material to the end product production.
• It has competitive advantage
• Cost control

Is a firm size determining factor in the vertical integration decision? That is, are large firms more likely to outsource production of inputs than are small firms? Why?

Yes, firm size is a determining factor for vertical integration decision.

Large firms are more likely to outsource production of raw materials/inputs than small firms. Because large firms are mainly concentrate on the business expansion rather than the business integration. At the same time small firms are mainly concentrate on the business integration rather than the business expansion.

Large firms are mainly concentrate on the business expansion rather than the business integration, Why?

The reasons are below

• To increase the business size
• To increase the foot print across the market
• To occupy all industry
• Having enough budget for the raw materials
• To become market leader in the particular industry

Small firms are mainly concentrate on the business integration rather than the business expansion, Why?

The reasons are below,

• For long term sustainability in the market
• To Maintain the cost
• To Manage the competitiveness
• To withstand their customer base
• To manage the proper supply chain process

Do firms adopting related diversification strategy necessarily produce similar products? Thoroughly justify your argument.

Yes. In some situation firms are adopting diversification strategy to produce similar products.

Diversification strategies are used to enumerate the firms operations by adding markets, products or services and the process of production on the existing business value chain.

Advantages of diversification strategies:

• It minimizes the risk of loss
• In a certain period of time a particular product line met with loss means, the other set of diversified product line can attain profit.
• Better competitiveness
• Vast range of market presence
• Better understanding of market
• Larger customer base