mgmt 352 vertical diversification

vertical integration is the firms…

ownership of its production of needed inputs or the channels by which it distributes its outputs

backward integration

integrating in the direction of raw materials

forward integration

integrating toward the customer

outsourcing

opposite of vertical integration

backward vertical integration

moving ownership of activities upstream to the originating inputs of the value chain

forward vertical integration

moving ownership of activities closer to the end customer

transaction costs

costs associated with an economic exchange 

in-house business activities incur internal transaction costs

recruiting & retaining employees, administrative costs associated w/ coordinating economic activity between different business units, tend to increase w/ organizational size & complexity 

transaction in the market incur external transaction costs

searching for a firm to contract w/, negotiating, monitoring, & enforcing the contract

benefit of vertical integration

secures critical supplies & distribution channels (more control), increase operational efficiencies through improved coordination between different value chain activities, facilitates investments in specialized assets

risks of vertical integration

reduces strategic flexibility particularly in the case of changes in the external environment, diseconomies of scope, low incentives of in-house suppliers

taper(ed) integration

backward or forward integration + reliance on outside firms such as suppliers or distributors, also known as concurrent sourcing