Question

Explain the risk reduction hypothesis for vertical integration?

Can someone explain this a little better, I got an answer but it was so long and confusing that I still do not understand

Answer 1

Risk reduction hypothesis for vertical integration implies that vertical integration reduces the risks faced by the business that it can come across if it is not vertically integrated and depends on other businesses for its supplies and other business functions. Risk reduction hypothesis of vertical says that a business can reduce its risks if it is vertically integrated and manages different stages in the business by itself like sourcing, manufacturing, supply chain, marketing etc. It gives the business to avoid market fluctuations or uncertainty in business as vertical integration makes it self sufficient and efficient. There are risks involved with vertical integration also but the business depending on its size and type of business can take decisions about vertical integration strategy for reduction of costs. Developing its own supply chain and managing all functions of the business is profitable when the business size is big or the business has a niche market so that the business can survive market fluctuations and reduce extra costs of transactions and exchanges.