Question

In: Statistics and Probability

Discuss any one of these strategies. Vertical Integration Strategies or Outsourcing Strategies. Why should a company...

Discuss any one of these strategies. Vertical Integration Strategies or Outsourcing Strategies. Why should a company choose to or not implement any of these strategies?

Solutions

Expert Solution

Vertical integration Strategy :

It is one in which one company operates at more than one level of the distribution channel. The distribution channel begins with the manufacturer that makes a product. The manufacturer sells the product to a wholesaler. The wholesaler sells to retailers, who ultimately sell to end customers.

If a manufacturer decides to sell directly to end customers, that is an example of integration. The manufacturer is expanding forwards on the production path, so this is known as forward vertical integration. When a wholesaler or retailer manufactures, it uses backward vertical integration

Vertical integration is a competitive strategy by which a company takes complete control over one or more stages in the production or distribution of a product. It is covered in business courses such as the MBA and MiM degrees.

A company opts for vertical integration to ensure full control over the supply of the raw materials to manufacture its products. It may also employ vertical integration to take over the reins of distribution of its products.

A classic example is that of the Carnegie Steel Company, which not only bought iron mines to ensure the supply of the raw material but also took over railroads to strengthen the distribution of the final product. The strategy helped Carnegie produce cheaper steel, and empowered it in the marketplace.

Firms can pursue forward, backward or balanced VI strategies.

Several factors affect the decision-making that goes into backward and forward integration. A company may go in for these strategies in the following scenarios:

  • The current suppliers of the company’s raw materials or components, or the distributors of its end products, are unreliable
  • The prices of raw materials are unstable or the distributors charge high fees
  • The suppliers or distributors earn big margins
  • The company has the resources to manage the new business that is currently being taken care of by the suppliers or distributors
  • The industry is expected to grow significantly

Advantages of vertical integration

What are the benefits of vertical integration? Let us take the example of a car manufacturer implementing this strategy. This company can

  • smoothen its supply chain (by ensuring ready supply of tyres and electrical components in the exact specifications that it requires)
  • make its distribution and after-sales service more efficient (by opening its own showrooms)
  • absorb for itself upstream and downstream profits (profits that would have gone to the tyre and electrical companies and showrooms owned by others)
  • increase entry barriers for new entrants (by being able to reduce costs through its own suppliers and distributors)
  • invest in specific functions such as tyre-making and develop its core competencies

Disadvantages of vertical integration

But what is the downside? What are the drawbacks of vertical integration? Let us see the main disadvantages.

  • The quality of goods supplied earlier by external sources may fall because of a lack of competition.
  • Flexibility to increase or decrease production of raw materials or components may be lost as the company may need to sustain a level of production in pursuit of economies of scale.
  • It may be difficult for the company to sustain core competencies as it focuses on the integration of the new units.

However, there are alternatives to vertical integration, such as purchases from the market (of tyres, for example) and short- and long-term contracts (for showrooms and with service stations, for example).


Related Solutions

Define Vertical Integration Strategies (Forward, Backward & Horizontal Integration)
Define Vertical Integration Strategies (Forward, Backward & Horizontal Integration)
Find some companies with the following strategies: Backward vertical integration, Forward vertical integration, Horizontal integration, Conglomerate...
Find some companies with the following strategies: Backward vertical integration, Forward vertical integration, Horizontal integration, Conglomerate merger
“Why should Company Strategies be ethical?”
“Why should Company Strategies be ethical?”
Discuss the economic incentives for vertical integration (as opposed to spot markets or contracts) in the...
Discuss the economic incentives for vertical integration (as opposed to spot markets or contracts) in the petroleum industry as the global oil market increased in sophistication. Discuss the differences between exchanges and OTC or bilateral market
When and how does the vertical integration become a solution for a company to maintain its...
When and how does the vertical integration become a solution for a company to maintain its competitive advantage? Enrich your answer by suitable examples from Saudi market?
Why should the customer be kept informed of progress and advised of any delays? Discuss in...
Why should the customer be kept informed of progress and advised of any delays? Discuss in 100–120 words.
This week let’s discuss integration. 1. Name a company that practices horizontal integration and describe the...
This week let’s discuss integration. 1. Name a company that practices horizontal integration and describe the structure. 2. Name a company that practices vertical integration and describe the structure. 3. In your opinion, which is better to work for? Which offers workers the better opportunity to better yourself? 4. If you owned the business, which would you implement? Think again about the workers opportunities. Does their betterment also mean what’s best for your business? Please number each question and provide...
Find an example of a company that was successful in outsourcing and one that was unsuccessful....
Find an example of a company that was successful in outsourcing and one that was unsuccessful. Do you think outsourcing is good or bad for the US economy? Explain why. Provide your response in a Word document of no more than two pages in length.
Explain the meaning and role of trade-off to any company and discuss why it is considered...
Explain the meaning and role of trade-off to any company and discuss why it is considered one of the PDM elements
explain the process of European monetary integration and discuss any mistakes which may have been made...
explain the process of European monetary integration and discuss any mistakes which may have been made in the way it took place. (Monetary union policy , the economic of Europe) book Al-graa, Ali and Ardy, Brain(eds.) The European Union: Economics and Policies, Ninthe Edition (Cambridge University Press, 2011)
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT