401 Chapter 7,8,9

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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