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What You Will Learn
1. Overview of corporate strategy.
2. Definitions of forward and backward vertical integration
3. Historical reasons for vertical integration
4. Benefits and limitations of using a vertical integration strategy
5. When and when not to vertically integrate
Why Learn It?
Vertical integration is one of the strategies firms use to try to create a competitive advantage for the entire corporation. Historically, firms relied heavily upon vertical integration to control the supply of inputs, assure the quality of inputs, create or control product distribution, and avoid opportunism by either suppliers or buyers. In the past couple of decades, more and more firms have outsourced various parts of the value chain for their products in an effort to control costs among other things. The debate over outsourcing remains a fierce one. Management teams must decide whether and what to outsource due to competitive pressures to increase efficiencies and tap in to specialized knowledge from companies outside the firm. In addition, the threat of opportunism is still a very real risk to corporate profitability. Knowing when and when not to vertically integrate is an important part of effective corporate resource allocation, and perhaps, of competitive advantage.
Corporate Level Strategies
Corporate strategies are actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously. The two forms of corporate strategies are vertical integration and diversification. These forms determine the scope of the enterprise – the activities the firm will perform vs. the activities the firm will purchase from other firms (leave up to the marketplace); and the businesses the firm will operate. There are three vehicles firms can use to enact these strategies – organic growth (build from within); strategic alliances (team up with another firm), and mergers and acquisitions (buy or combine with another firm).
1. Overview of corporate strategy.
2. Definitions of forward and backward vertical integration
3. Historical reasons for vertical integration
4. Benefits and limitations of using a vertical integration strategy
5. When and when not to vertically integrate
Why Learn It?
Vertical integration is one of the strategies firms use to try to create a competitive advantage for the entire corporation. Historically, firms relied heavily upon vertical integration to control the supply of inputs, assure the quality of inputs, create or control product distribution, and avoid opportunism by either suppliers or buyers. In the past couple of decades, more and more firms have outsourced various parts of the value chain for their products in an effort to control costs among other things. The debate over outsourcing remains a fierce one. Management teams must decide whether and what to outsource due to competitive pressures to increase efficiencies and tap in to specialized knowledge from companies outside the firm. In addition, the threat of opportunism is still a very real risk to corporate profitability. Knowing when and when not to vertically integrate is an important part of effective corporate resource allocation, and perhaps, of competitive advantage.
Corporate Level Strategies
Corporate strategies are actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously. The two forms of corporate strategies are vertical integration and diversification. These forms determine the scope of the enterprise – the activities the firm will perform vs. the activities the firm will purchase from other firms (leave up to the marketplace); and the businesses the firm will operate. There are three vehicles firms can use to enact these strategies – organic growth (build from within); strategic alliances (team up with another firm), and mergers and acquisitions (buy or combine with another firm).