chapter 8 pt 2

specialized assets 3 types

- *site specificity* required to be co-located, such as the equipment necessary for mining bauxite and aluminum smelting. - *physical-asset specificity* physical and engineering properties are designed to satisfy a particular customer - *human-asset specificity* investments made in human capital to acquire unique knowledge and skills, such as mastering the routines and procedures of a specific organization, which are not transferable to a different employer.

TAPER INTEGRATION alternative of vertical integration

A way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside-market firms for some of its supplies and/or is forwardly integrated but also relies on outside-market firms for some of its distribution. - Both Apple and Nike, for example, use taper integration: They own retail outlets but also use other retailers, both the brick-and-mortar type and online.

forward vertical integration

Changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain.

backward vertical integration

Changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain.

strategic outsourcing alternatives of vertical integration

Moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain. (offshoring: outsourced activities take place outside the home country)

What % of a firm's sales is generated within the firm's boundaries?

The degree of vertical integration tends to correspond to the number of industry value chain stages in which a firm directly participates.

vertical integration

The firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs.

RISKS OF VERTICAL INTEGRATION.

increasing costs, reducing quality, reducing flexibility, increasing the potential for legal repercussions

Vertical integration, either backward or forward, can have a number of benefits, including

- Lowering costs. - Improving quality. - Facilitating scheduling and planning. - Facilitating investments in specialized assets. - Securing critical supplies and distribution channels.

first key question when formulating corporate strategy is

In what stages of the industry value chain should the firm participate?

Backward and Forward Vertical Integration along an Industry Value Chain

- *stage 1* raw materials - *stage 2* intermediate goods & components (integrated circuits, displays, touch screen, cameras, batteries) - *stage 3* Final Assembly and Manufacturing (Original equipment manufacturing firms) - *Stages 4* Marketing, Sales - *Stage 5* After-Sales Service & Support = *global industry value chain*

There are various general diversification strategies:

- A firm that is active in several different product markets is pursuing a *product diversification strategy* - A firm that is active in several different countries is pursuing a *geographic diversification strategy* - A company that pursues both a product and a geographic diversification strategy simultaneously follows a *product-market diversification strategy*

Taper integration has several benefits

- It exposes in-house suppliers and distributors to market competition so that performance comparisons are possible. Rather than hollowing out its competencies by relying too much on outsourcing, taper integration *allows a firm to retain & fine-tune its competencies in upstream & downstream value chain activities* - enhances a firm's flexibility; a firm could cut back on the finished goods it delivers to external retailers while continuing to stock its own stores. - firms can combine internal and external knowledge, possibly paving the path for innovation

A higher degree of vertical integration can lead to increasing costs for a number of reasons.

- in-house suppliers tend to have higher cost structures because they are not exposed to market competition; Knowing there will always be a buyer for their products reduces their incentives to lower costs. - Organizational complexity increases with higher levels of vertical integration, thereby increasing administrative costs such as determining the appropriate transfer prices between an in-house supplier and buyer - suppliers in the open market, because they serve a much larger market, can achieve economies of scale that elude in-house suppliers

Investments in specialized assets

- tend to incur high opportunity costs because making the specialized investment opens up the threat of opportunism by one of the partners - Backward vertical integration is often undertaken to overcome the threat of opportunism and to secure key raw materials.