Slides 15 Flashcards
What is Vertical Integration?
When a company expands its operations into different stages of production within the same industry rather than contracting with external suppliers, service providers, or sellers.
What is the Make-or-Buy Decision?
When a company has to decide between performing an activity itself or purchasing it from an independent firm.
What is Backwards Integration?
Producing component parts and sourcing raw materials for your product.
What is Forward Integration?
Selling and distributing the product to consumers.
What is the unavoidable choice in the make-or-buy decision?
All stages of production must be performed.
What factors do companies evaluate in the make-or-buy decision?
The resulting impacts to product costs and quality.
Why is Vertical Integration important?
Reduces uncertainty and gives companies more control over quality and delivery times.
What are the benefits of making components in-house?
- Reduces uncertainty
- More control over quality and delivery times
- Leverages internal fixed assets for economies of scale
- Easier to meet sustainability goals
What are the costs of making components in-house?
- Allocation of investment money away from key activities
- Management oversight of more activities, reducing focus on key activities
What are the benefits of buying components from market firms?
- Lower costs or higher quality
- Better economies of scale
- More focus on key activities
What are the costs of buying components from market firms?
- Complexity in coordinating supply chain
- Risk of sharing patents leading to data leaks
- Loss of control over production
What are opportunity costs in the context of making components?
Every dollar spent on one activity cannot be used on another activity.
What are Transaction Costs?
The complicated and time-consuming process of buying large quantities of supplies and coordinating with distribution partners.
Define Relationship Specific Assets.
A fixed asset that specifically supports a particular ‘Buy’ transaction between two companies.
What are the types of Relationship Specific Assets?
- Site Specificity
- Physical Asset Specificity
- Human Asset Specificity
What is Technical Specificity?
When a component part becomes more specialized towards a single buyer, leading to increased expense.
What is Quasi-Rent?
Economic returns generated from temporary or situational factors.
What is the Holdup Problem?
Occurs when the party with more power uses that power to renegotiate contract terms in their favor.
Provide an example of the Holdup Problem.
When Netflix began creating its own content due to studios wanting to charge more for their existing content.
When should companies buy a component product or service?
If the manufacturing of a component part is outside of the firm’s core competencies.
What is vertical integration?
A strategy where a company controls multiple stages of production or supply chain.
When should companies buy a component product or service?
When:
* Manufacturing is outside core competencies
* Economies of scale cannot be utilized
* An external firm offers a lower price
* An external firm can produce higher quality.
What is an example of a company that practices vertical integration?
IKEA manufactures the wood used in its furniture.
Fill in the blank: A company should make a component product if it is a new or complicated product that no external firms can/will produce, or if it involves a _______.
[trade secret]
What happens when firms miscalculate the make-or-buy decision?
They can end up with:
* Over-allocated resources
* Loss of flexibility
* Missed strategic opportunities
* Reputational risks
* Reductions in quality
* Supply chain stoppages.
True or False: Vertical integration is very common today.
False
What led to the decline of vertical integration?
Factors include:
* Globalization
* Cheaper manufacturing in developing countries
* Decrease in global shipping costs
* Better communication technologies.
What are the three key activities most large corporations perform in-house?
- Research and Development/Engineering
- High Level Marketing/Branding
- Product Assembly
What was a disaster example of poor vertical integration?
AT&T’s acquisition of WarnerMedia.
What financial burden did AT&T face after acquiring WarnerMedia?
$20 billion in debt.
Fill in the blank: SpaceX produces ______% of its own parts.
[85]
What are the implications of the Covid-19 pandemic on supply chains?
Factory slowdowns disrupted production and led firms to encourage suppliers to relocate closer to home.
What is the holdup problem in supplier relationships?
When firms mismanage supplier relationships, leading to dependency and potential losses.
What is one reason companies may choose to outsource production?
To manage costs effectively in a globalized economy.
What is a common practice of technology companies regarding vertical integration?
Combining hardware and software.
What is the significance of economies of scale in vertical integration?
It allows firms to lower costs by increasing production.
What type of products typically require in-house production due to complexity?
New or complicated products.
True or False: Vertical integration was a popular strategy 100 years ago.
True
What are some consequences of poor vertical integration?
Can lead to financial losses, operational inefficiencies, and reduced quality.
What does vertical integration look like today for large corporations?
Outsourcing most production and sales activities while keeping R&D, high-level marketing, and assembly in-house.
When should companies consider making a component product?
When:
* It involves a trade secret
* There is overlap with existing core competencies
* Economies of scale can be achieved.
