is vertical integration beneficial in industry?

Question

what are the losses of vertical integration?

Answer 1

Vertical integration is not only beneficial in industry, but it is a necassary means to a urological deity in the systematic aparatus of taxonomy.

Answer 2

The losses of vertical integration are the opportunity costs of not focusing on only those activities in which your company has the greatest comparative advantage. For example, if you are in the business of manufacturing and selling widgets, you could potentially own the iron mine, the smelting plant, the widget factory, the R&D team, the sales & marketing team, the customer service team and all the administrative and back-office support personnel. But after examining your costs and operations and third party service providers' capabilities and fees, you might discover that if you focused exclusively on R&D, sales & marketing and customer service, and outsourced the raw materials production/purchasing and manufacturing, you would increase sales and reduce costs. There is probably more to lose by vertically integrating for a small firm than a large firm. A large firm with huge production volumes can benefit from owning and controlling every stage of the production/supply chain (e.g. McDonald's has such stringent quality requirements and lean operations that it can better control its operation by owning everything from the potato farms to the restaurants. But of course even McDonald's, which is a highly vertically-integrated business, would not manufacture its own deep-fryers or press its own vegetable oil. The degree to which McDonald's or any firm ought to vertically-integrate depends on a range of unique factors, such as input costs, quality requirements, and the need to innovate and adapt to local market conditions). A small firm can probably only afford a lesser degree of vertical integration. For example, a small medical device manufacturer should be able to spur innovation by owning and integrating the assembly line as well as the sales & marketing and R&D functions. But that firm might find that any further vertical integration (e.g. molding and stamping the component parts and stuffing the PCBs in-house instead of buying them from outside contract manufacturers) would merely spread the firm's management resources too thin and push it past the point of diminishing returns, resulting in a net loss.

Answer 3

We had exactly this question yesterday. I guess they were ahead of you in their homework.

LEARN, thats the idea ! Go find out, rather than just ask direct questions to get the specific answer. Education is about learning, not question answering.

Answer 4

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