Strategic Advantages of Backward Integration

Strategic Advantages of Backward Integration

* Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers

- Potential to reduce costs exists when

- Suppliers have sizable profit margins

- Item supplied is a major cost component

* Resource requirements are easily met

* Can produce a differentiation-based competitive advantage when it results in a better quality part

* Reduces risk of depending on suppliers of crucial raw materials / parts / components

Strategic Advantages of Forward Integration

* To gain better access to end users and better market visibility

* To compensate for undependable distribution channels which undermine steady operations

* To offset the lack of a broad product line, a firm may sell directly to end users

* To bypass regular distribution channels in favor of direct sales and Internet retailing which may

- Lower distribution costs

- Produce a relative cost advantage over rivals

- Enable lower selling prices to end users

Strategic Disadvantages of Vertical Integration

* Boosts resource requirements

* Locks firm deeper into same industry

* Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety

* Poses all types of capacity-matching problems

* May require radically different skills / capabilities

* Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products

Pros and Cons of Integration vs. De-Integration

* Whether vertical integration is a viable strategic option depends on its

- Ability to lower cost, build expertise, increase differentiation, or enhance performance of strategy-critical activities

- Impact on investment cost, flexibility, and administrative overhead

- Contribution to enhancing a firm's competitiveness

Many companies are finding that de-integrating value chain activities is a more flexible, economic strategic option!

Outsourcing Strategies

* Concept:

- Outsourcing involves withdrawing from certain value