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• Vertical integration maynotenableacompanytorealizeeconomiesofscaleif 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 ThinkingBlooms: UnderstandDifficulty: 3 HardLearning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.Topic: Vertical Integration102.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, whena 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 tomarket.• 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 ThinkingBlooms: UnderstandDifficulty: 3 HardLearning 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 valuechain activities to outside parties.Topic: Outsourcing StrategiesTopic: Vertical Integration103.Identify and explain at least two drawbacks to forming a strategic alliance.Strategic alliances suffer from some drawbacks. Anticipated gains mayfail to materialize due to an overly optimistic view of the synergies or a poor fit in terms of the combination of resources and capabilities.