401 Chapter 7,8,9

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Chapter 7 What is Vertical Integration ● Outsourcing - a process in a firm contracts out a business process or activity to an external supplier ● Vertical integration/insourcing - bringing business processes or activities previously conducted by outside companies in-house WHY COMPANIES CHOOSE to Conduct activity within the firm and what benefits of outsourcing Value Chain ● Critical to the "make vs buy" decision ● Value chain - sequence of all activities that are performed by a firm to turn raw materials into the finished product that is sold to a buyer ○ Each key activity adds value to the prior activity ● ● Companies have their own value chains that are distinct from an industry value chain ● Companies that participate in many or all stages of the industry value chain from exploration are HIGHLY INTEGRATED ● Companies that participates in only one activity (EX: shipping) are vertically specialized ● Upstream activities - Activities closer to the beginning of the inductee value chain or raw materials used ● Downstream activities - towards the end and final products that consumers buy Forward and Backwards Integration
● If company wants to grow moving forward in value chain - it is downstream - it is forward integration ● Example - oil refining company that wants to open own gas stations to sell gas ● If company wants to grew by moving backwards in value chain - upstream - backwards integration ○ Example - drilling company that wants to do own exploration ● For ANY GIVEN activity in VC → org leaders must anser key question: ○ Do we make it or do we buy it? ○ Whether to build capability that will allow better job ofoffering unique value or have a compay do it ● Vertical integration can lead to low cost or differentiated product to customer Three Key Reasons to Vertically Integrate ● Three main reasons ○ Capabilites ○ Coordination ○ Control ○ ● Capabilities ○ Refers to if firm can build or has the capabilities to perform activity better than other firms ○ TO WHAT EXTENT ARE WE OR COULD WE the best in the world at conducting this activity ○ If it is the best → do it ○ If not the best → outsource to other companies that has stronger capabilities ○ Be able to prevent subcontractors of shows to become competitors
○ Subcontractors - a supplier that provides an input at a local firm - are often used to describe suppliers that are contracted to create customized inputs for a firm. ● Coordination ○ Refers to the question of whether the firm is better able to effectively coordinate the activity with other activities in the firm when both are conducted internally ○ Lowers the coordination costs associated with 2 interdependent activities and offers unique value by conducting ourselves ○ Some activities require more coordination than others ○ The greater interdepended between activities the more it makes sense to vertically integrate and have these done within a company where the team members can effectively coordinate work ○ How do managers know if 2 activities require high levels of coordination and are better conducted within the firm ■ Understand the nature of the interdependences of activities ■ With less interdependent activities being outsourced and more interdependent activities being conducted within the firm ○ Three types of interdependence ○ ■ Modular - low levels of coordination and results are POOLED together but the indiv activities can be conducted without coordination with other activities
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