Essay About Cost Savings And Strategic Advantages

Strategic Advantages of Backward Integration
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Strategic Advantages of Backward Integration
* Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers
– Potential to reduce costs exists when
– Suppliers have sizable profit margins
– Item supplied is a major cost component
* Resource requirements are easily met
* Can produce a differentiation-based competitive advantage when it results in a better quality part
* Reduces risk of depending on suppliers of crucial raw materials / parts / components
Strategic Advantages of Forward Integration
* To gain better access to end users and better market visibility
* To compensate for undependable distribution channels which undermine steady operations
* To offset the lack of a broad product line, a firm may sell directly to end users
* To bypass regular distribution channels in favor of direct sales and Internet retailing which may
– Lower distribution costs
– Produce a relative cost advantage over rivals
– Enable lower selling prices to end users
Strategic Disadvantages of Vertical Integration
* Boosts resource requirements
* Locks firm deeper into same industry
* Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety
* Poses all types of capacity-matching problems
* May require radically different skills / capabilities
* Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products
Pros and Cons of Integration vs. De-Integration
* Whether vertical integration is a viable strategic option depends on its
– Ability to lower cost, build expertise, increase differentiation, or enhance performance of strategy-critical activities
– Impact on investment cost, flexibility, and administrative overhead
– Contribution to enhancing a firms competitiveness
Many companies are finding that de-integrating value chain activities is a more flexible, economic strategic option!
Outsourcing Strategies
* Concept:
– Outsourcing involves withdrawing from certain value