Strategic Management – Chapter 7: Vertical Integration and Outsourcing

15 question-and-answer flashcards covering definitions, motivations, advantages, and dangers of vertical integration and outsourcing, plus related strategic concepts from Chapter 7.

What is outsourcing in the context of strategic management?

Contracting out a business process or activity to an external supplier.

Define vertical integration (also called insourcing).

Bringing business processes or activities that were previously conducted by outside companies in-house.

What is a value chain?

The sequence of activities that transforms raw materials into finished products, with each step adding value to the previous one.

What is forward integration?

Growth by moving downstream in the value chain, closer to the final customer (e.g., a manufacturer opening its own retail stores).

What is backward integration?

Growth by moving upstream in the value chain, closer to raw material sources or earlier production stages (e.g., a retailer acquiring a supplier).

How does a highly vertically integrated company differ from a vertically specialized company?

A highly integrated firm participates in most or all stages of the industry value chain, whereas a vertically specialized firm participates in only one activity.

What are the 3 Cs that motivate vertical integration?

Capabilities, Coordination, and Control.

In the 3 Cs framework, what key question is asked under Capabilities?

To what extent are we, or could we be, the best in the world at conducting this activity?

How does Coordination justify vertical integration?

Conducting the activity internally can improve performance—such as speed to market or quality—through better coordination of linked activities.

What are the 2 Fs—dangers—of vertical integration?

Loss of Flexibility and Loss of Focus.

List four advantages of outsourcing.

1) Flexibility to switch to the best supplier, 2) Lower costs or better performance via specialization and economies of scale, 3) Greater managerial focus on core activities, 4) Lower capital investment requirements for growth.

What are the two main dangers of outsourcing?

Loss of Capabilities (potentially harming future innovation) and Loss of Control/Power (supplier gains undue influence over a critical activity).

Give three ways to prevent a subcontractor from becoming a competitor.

1) Build barriers to imitation (brand strength, frequent design changes, unique relationships), 2) Limit knowledge of the full product by splitting component production or retaining key parts in-house, 3) Take an equity stake in the supplier.

How does interdependence among activities influence the integrate-vs-outsource decision?

Greater interdependence often favors vertical integration to manage complex coordination; lower interdependence allows outsourcing without major performance loss.

Why can vertical integration reduce flexibility in a volatile environment?

Owning upstream or downstream assets makes it harder and costlier to adjust to technological or market changes compared to simply switching external suppliers.