Vertical integration if its

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• Vertical integration maynotenableacompanytorealizeeconomiesofscale if its production levels are below the minimum efficient scale. • Vertical integration poses all kinds of capacity-matchingproblems. • Integration forward or backward often callsfordevelopingnewtypesofresourcesandcapabilities. AACSB: Analytical Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration. Topic: Vertical Integration 102 . What are the merits of outsourcing the performance of certain value chain activities as opposed to performing them in-house? Under what circumstances does outsourcing make good strategic sense? Outsourcing strategies narrow the scope of a business’s operations, in terms of what activities are performed internally. A company can improve its cost position and competitiveness by performing a broader range of industry value chain activities in-house rather than having such activities performed by outside suppliers. When there are few suppliers and when the item being supplied is a major component,
vertical integration can lower costs by limiting supplier power. Vertical integration can also lower costs by facilitating the coordination of production flows and avoiding bottleneck problems. Furthermore, when a company has proprietary know-how that it wants to keep from rivals, then in-house performance of value-adding activities related to this know how is beneficial even if such activities could otherwise be performed by outsiders. Outsourcing certain value chain activities makes strategic sense whenever: • An activity can be performed better or more cheaply by outside specialists. • The activity is not crucial to the firm’s ability to achieve sustainable competitive advantage. • The outsourcing improves organizational flexibility and speeds time to market. • It reduces the company’s risk exposure to changing technology and buyer preferences. • It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best. AACSB: Analytical Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration. Learning Objective: 06-05 The conditions that favor farming out certain value chain activities to outside parties. Topic: Outsourcing Strategies Topic: Vertical Integration 103 . Identify and explain at least two drawbacks to forming a strategic alliance. Strategic alliances suffer from some drawbacks. Anticipated gains may fail to materialize due to an overly optimistic view of the synergies or a poor fit in terms of the combination of resources and capabilities.

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