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VERTICAL INTEGRATION and OUTSOURCING Make or Buy (REASONS WHY…
VERTICAL INTEGRATION
and OUTSOURCING
Make or Buy
VERTICAL INTEGRATION
less risky
BACKWARD: You do what the SUPPLIERS do
FORWARD: You do what the BUYERS do
REASONS WHY
Coordination
Sequential interdependence (moderate teamwork)
Reciprocal Int (high teamwork - vertical integration)
Modular Interdependence (Low teamwork - outsourcing)
Control
Weak intellectual rights (you want to "buy" the knowlede)
patents
trade secret
Quality unobservable, so you outsource when the consumer can't tell the difference
Capabilities
Asset Specificity: when a company is too specific and because of that has high exit costs. (physical, location, human, temporal)
Power Theory
Backward
Counter supplier power
Create entry barriers
raise rival costs
Forward
lower buyer power
create entry barriers
block competitors on the distribution
DANGERS
Loss of flexibility: technology change, demand shift, consumer behavior change
Loss of focus
Challenges of integration
Weaker incentive mechanisms
OUTSOURCING
More Flexibility
More Focus
Power of the market
DANGERS
Loss of capabilities
Lack of control
Ethical Issues (Nike)
Use market
Use alliance
Vertical integration