Vertical Integration

The article “Vertical Integration or Outsourcing?” provides background information on factors that influence the decision regarding a business undertaking a supply chain. The article commences by providing a definition of key concepts such as supply chain, integration, and the levels of integration. The factors that determine the supply chain to be undertaken by an organization are also outlined, and they include the satisfaction of both the shareholders’ and customer’s interest. In the literature review of the article, the difference between vertical integration and outsourcing is established, and the difference between the two advices a firms’ decision to either engage in vertical integration or outsource of its activities.

This paper provides a review of the article “Vertical integration or outsourcing?”

The article defines a supply chain as a network of business organizations that are interested in the success of each other. Thus, a supply chain is what brings about business integrations, which have been divided into four categories that include vertical integration, virtual integration, strategic alliance integration, and arms-length integration. In this case, vertical integration is a form of integration whereby a business entity or individual does all production and marketing services solely without incorporation of subcontractors. Virtual integration comprises of a supply chain based on long-term relationships factoring consultations and competencies of all the entities. On the other hand, strategic alliances differ from virtual integration as it encompasses engagements that are not long-termed. In addition, the entities have mutual interests. Lastly, arms-length contracts are like trade intercourse as the integration is ended immediately on completion.

The factors that determine whether to integrate vertically or outsource are also discussed, and they include the satisfaction of customers and needs of shareholders. These two factors influence the decision to be taken, as they are the key determiners of the success of a business organization. Notably, to determine a method of integration for adoption by any organization is essential and the factors that promote this include constraints caused by resources, an organization’s limits, and the capability of an organization. Reasons advanced for an organization, to settle on outsourcing include the influence of decisions, capacity flexibility, and the demand structure.

Several points are outlined as merits to an organization for adopting vertical integration. Firstly, vertical integration aids in reduction of risks to a business. Such risks include the reduction of investments that are based on a localized environment. This risk amounts because when outsourced, a certain activity of the supply chain will be taken by one of the organization in the supply chain, which is localized and increases chances of losses to a business in the event of an uncertainty. Secondly, an organization indulging in vertical integration has higher chances of developing exceptional competency. This is because the organization deals with all the steps entailed in the production and marketing of their service; thus, hitches in the production and marketing are eliminated. Another advantage for a firm to use vertical integration is that the value of shareholders is increased. This is because the turnover on assets is decreased.

In conclusion, the article provides a review concerning the type of integration that a firm can undertake. Several methods of integration have been outlined, and they include vertical integration, virtual integration, strategic alliance, and arms length contracts. Vertical integration differs from the other types of integration because it does not involve entry into a contract with any other firm. Notably, several benefits are associated with vertical integration, and they include an increase of the shareholders value, developing exceptional competency, and the reduction of business risks. It is also essential that an organization factor several points before settling on the type of integration that their business requires.