Vertical Integration Essay - Part 3

What alternative to vertical integration (focus on: strategic alliances & tapered integration) are available to companies? what are the advantages & disadvantages of tapered integration? The alternative to vertical integration include: Tapered Integration: Make and Buy Tapered integration represents a mixture of vertical integration and market exchange. A manufacturer might produce some quantity of an input itself and purchase the remaining portion from independent firms. It might sell some of its product through an in-house sales force and rely on an independent manufacturers’ representative to sell the rest.

Advantages: 1. It expands the firm’s input and / or output channels without requiring substantial capital outlays. 2. The firm can use information about the cost and profitability of its inter channels to help negotiate contracts with independent channels. 3. The firm can motivate its internal channels by threatening to expand outsourcing and, at the same time, motivate its external channels by threatening to produce more in-house. 4. Finally, the firm can protect itself against holdup by independent input suppliers.

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Disadvantages: 1. Forced to share production, both the internal and external channel might not achieve sufficient scale to produce efficiently. Shared production may lead to coordination problems if the two production units must agree on product specifications and delivery times. 2. A firm’s monitoring problems may be exacerbated. For example, the firm may mistakenly establish the performance of an inefficient internal supplier as the standard to be met by external suppliers. 3. Managers may maintain inefficient internal capacity rather than close facilities that had formerly been critical to the firm.

An example of the approach is the excess capacity for internal productions that major movie studios maintain. Strategic Alliances Since the 1970s, firms have increasing turned to strategic alliances as a way to organize complex business transactions collectively without sacrificing autonomy. Allying partners are usually involved in multiple market activities. Some firms have alliance partners in many different markets while remaining fully integrated in others. Alliances may be horizontal, involving collaboration between two firms in the same industry, for more than a decade, Toyota Motors Inc. nd Fuji Heavy Industries Ltd. have engaged in strategic alliances in an effort to keep their prices competitive and to stay abreast of evolving technology. They may be vertical, as exemplified by Toyota’s alliances with its suppliers, such as Denso. Or they may involve firms that are neither in the same industry nor related through the vertical chain, for example, Toyota Tsusho Corporation formed a strategic alliance with Environmental Systems Products Holdings Inc. (ESP) in 2002, to serve markets with clean air technology.

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