Chapter 6

LO 4 Discuss how vertical integration can create value by enabling a firm to retain its flexibility

Flexibility refers to how costly it is for a firm to alter its strategic and organizational decisions. Flexibility is high when the cost of changing strategic choices is low. It doesn't able a firm to retain its flexibility..? Vertical integration is a loss of flexibility.

LO 6 Describe how the functional organization structure, management controls, and compensation policies are used to implement vertical integration

Functional or U-form structure used to implement a vertical integration strategy. Management Controls - Budgeting process and management committee oversight process (executive committee and operations committee) Compensation - opportunism-based compensation policy = firm specific investments such as understand of culture, personal relationships, knowledge of processes, etc.

LO 1 Define vertical integration, forward vertical integration, and backward vertical integration.

Level of Vertical Integration - is simply the number of steps in this value chain that a firm accomplishes within its boundaries. Forward Integration - when it incorporates more states of the value chain within its boundaries and those stages bring it closer to the end of the value chain; closer to the end customer Backward Integration - incorporates stages bring it closer to the beginning of the value chain; close to gaining access to raw materials

LO 2 Discuss how vertical integration can create value by reducing the threat of opportunism

Opportunism - exists when a firm is unfairly exploited in an exchange. threat is greatest when a party to an exchange has made a transaction specific investment. One way to reduce the threat is to bring an exchange within the boundary of a firm, that is, to vertically integrate into this exchange. This way, managers in a firm can monitor and control this exchange instead of relying on the market to manage it.

LO 5 Describe conditions under which vertical integration may be rare and costly to imitate

Rare - transaction-specific investment, capabilities, and uncertainty. Costly-to-imitate - firm's ability to analyze the attributes of its economic exchanges and its ability to conceive and implement vertical integration strategies.

LO 3 Discuss how vertical integration can create value by enabling a firm to exploit its valuable, rare, and cost-to-imitate resources

Value - Lessens threat of opportunism, ability to generate sustained competitive advantage, impact on flexibility. Rare - when few competing firms are able to create value by vertically integrating in the same way. Costly-to-imitate - Direct duplication of vertical integration occurs when competitors develop or obtain the resources and capabilities that enable another firm to implement a valuable and rare vertical integration strategy. Substitution occurs through strategic alliances.