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 ...