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Week [18] Corporate strategy: vertical integration - Coggle Diagram
Week [18] Corporate strategy: vertical integration
Johnson et al. (2017, p. 253) vertical integration= "organisation is its own supplier or customer"
" translates into a situation in which the firm directly controls more activities along the value chain or the
value system.
"
a set of interrelated value chains collectively create value for a final customer
searching for fossil fuel, drilling, transporting , and selling to end customer- this process under 1 single firm
‘vertical scope’
how far an organisation should be diversified in terms of products
(e.g. Grant, 2010, p. 348)
three areas
vertical
Vertical scope refers to the various backward (input) and forward (output) levels of the value system that a firm controls.
backward: extraction of basic raw materials
forward: distribution of products to retailer
ultimate objective of a firm deploying vertical integration is to find its optimal vertical scope of activities along the value system through which it would have a position of
(sustained) competitive advantage.
geographical
product market
Make or buy choices
outsourcing
conducting a cost–benefit analysis to see which is better
transaction cost theory (TCT)
(see Williamson, 1993; Johnson et al., 2017, p. 254).
decision firm managers need to make to transact either internally or externally.
advantages and disadvantages of transacting internal table
The
Transaction–asset matrix
Stuckey and White (1993) - check image
four different ways of coordinating transactions along value system
Asset specificity, durability and intensity.
specificy - how much an asset is specifically related to a transaction:
Asset durability refers to the possibility of consuming the asset fully during its use - eg plane costs lot of money but can be used for long time
Asset intensity refers to the amount of investment necessary to do the transaction- plane is expensive
transaction frequency:
forms of integration
Backward integration
backward integration manifests itself as a movement further back along the value chain or the value system
Forward integration
forward integration manifests itself as a movement further ahead along the value chain or value system.
Full integration
full control of value system
Horizontal integration
to connect two or more value systems
could also be considered as a form of product diversification (Johnson et al., 2017, p. 253).
eg making trucks , tractors and cars
reasons for vertical integration Robert Grant (2010, pp. 356–9)
differences between the optimal scale of operation at different stages of production
resources and capabilities required by different businesses
flexibility of responsiveness to different strategic dynamics
efficiency of the internal units
effects of vertical integration on competitive dynamics
potential of compounding the risks involved.
Differences between the optimal scale of operation at different stages of production
optimal scale of production is the lowest level assumed by the average total cost per product
eg coffee beans cheap to harvest but expensive further in production process
Resources and capabilities
producing steel for cars is a whole lengthy process when compare to the end stage of dealing the cars
"Vertical integration does not provide an advantage when need to adapt flexibly to changing conditions in a macro environment." tech parts always changing requirements
Efficiency of the internal organisational units
consider interface between the different parts of the value system.
Internal incentives should be in place to reduce this risk and reward the efficiency of the different divisions
solution: benchmark internal costs with external suppliers to verify whether the internal control on some activities is still an efficient choice
Effects of vertical integration on competitive dynamics
if firm acquires one of its suppliers, the firm’s other suppliers may decide not to do business with it anymore,
The potential of compounding the risks involved
Vertical disintegration
firm withdraws from activities where it has thus far been its own supplier and/or customer. Johnson et al. (2017).
additional sources page at bottom?