Tutorial 1 - Q9a
What alternative to vertical integration (focus on: strategic alliances & tapered integration) are available to companies? what are the advantages & disadvantages of tapered integration?
The alternative to vertical integration include:
Tapered Integration: Make and Buy
Tapered integration represents a mixture of vertical integration and market exchange. A manufacturer might produce some quantity of an input itself and purchase the remaining portion from independent firms. It might sell some of its product through an in-house sales force and rely on an independent manufacturers' representative to sell the rest. Advantages:
1. It expands the firm's input and / or output channels without requiring substantial capital outlays. 2. The firm can use information about the cost and profitability of its inter channels to help negotiate contracts with independent channels. 3. The firm can motivate its internal channels by threatening to expand outsourcing and, at the same time, motivate its external channels by threatening to produce more in-house. 4. Finally, the firm can protect itself against holdup by independent input suppliers. Disadvantages:
1. Forced to share production, both the internal and external channel might not achieve sufficient scale to produce efficiently. Shared production may lead to coordination problems if the two production units must agree on product specifications and delivery times. 2. A firm's monitoring problems may be exacerbated. For example, the firm may mistakenly establish the performance of an inefficient internal supplier as the standard to be met by external suppliers. 3. Managers may maintain inefficient internal capacity rather than close facilities that had formerly been critical to the firm. An example of the approach is the excess capacity for internal productions that major movie studios maintain.
Since the 1970s, firms have increasing turned to strategic alliances as a way to...
Please join StudyMode to read the full document