Which of the following is are potential disadvantages of vertical integration?
The degree to which a firm owns its upstream suppliers and its downstream buyers is referred to as vertical integration. Because it can have a significant impact on a business unit's position in its industry with respect to cost, differentiation, and other strategic issues, the vertical scope of the firm is an important consideration in corporate strategy. Show Expansion of activities downstream is referred to as forward integration, and expansion upstream is referred to as backward integration. The concept of vertical integration can be visualized using the value chain. Consider a firm whose products are made via an assembly process. Such a firm may consider backward integrating into intermediate manufacturing or forward integrating into distribution, as illustrated below: Example of Backward and Forward Integration No Integration Intermediate Manufacturing Backward Integration Intermediate Manufacturing Assembly Forward Integration Intermediate Manufacturing Assembly Distribution Two issues that should be considered when deciding whether to vertically integrate is cost and control. The cost aspect depends on the cost of market transactions between firms versus the cost of administering the same activities internally within a single firm. The second issue is the impact of asset control, which can impact barriers to entry and which can assure cooperation of key value-adding players. The following benefits and drawbacks consider these issues. Benefits of Vertical IntegrationVertical integration potentially offers the following advantages:
Drawbacks of Vertical IntegrationWhile some of the benefits of vertical integration can be quite attractive to the firm, the drawbacks may negate any potential gains. Vertical integration potentially has the following disadvantages:
Factors Favoring Vertical IntegrationThe following situational factors tend to favor vertical integration:
Factors Against Vertical IntegrationThe following situational factors tend to make vertical integration less attractive:
Alternatives to Vertical IntegrationThere are alternatives to vertical integration that may provide some of the same benefits with fewer drawbacks. The following are a few of these alternatives for relationships between vertically-related organizations:
Recommended Reading Greaver, Maurice F., Strategic Outsourcing : A Structured Approach to Outsourcing Decisions and Initiatives What are the disadvantages of vertical?The disadvantage of vertical integration is that it reduces the amount of diversification that an organization can access. If disruptions within the supply chain occur, then the entire operation is put at-risk until the supply chain can be restored.
What are the disadvantages of forward vertical integration?Disadvantages of vertical integration. Vertical mergers will have fewer economies of scale because production is at different stages of supply.. Mergers can often create new problems of communication and coordination within the bigger more disparate firm.. What are the risks of vertical integration?Risks in Vertical Integration. Established distribution channels may be adversely affected.. Unprofitable outcome.. Obsolescence due to new technologies.. Higher cost due to lower volume.. Unforeseen labor issues.. Lack of continued focus on the original business.. If acquisition is a commodity, not having lowest costs.. Which three of the following are advantages of vertical integration?Vertical integration requires a company's direct ownership of suppliers, distributors, or retail locations to obtain greater control of its supply chain. The advantages can include greater efficiencies, reduced costs, and more control along the manufacturing or distribution process.
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