Kenia Ritka Ayutimur

Disadvantages of a Vertical Integration Strategy point 3-6, Outsourcing

Strategies, Strategic Alliances, The Dangers of Relying on Alliances

Vertical integration has some disadvantages, such as

4. It can results in less flexibility in accommodating shifting buyer preferences when a new
product design doesnt include parts and components that the firm makes in-house.
5. It creates capacity-matching problems among integrated in-house component
manufacturing units.
6. And it may require development of new and different skills and business capabilities; a
vertical integration strategy has appeal only if it significantly strengthens a firms
competitive position and/or boosts its profitability.

Outsourcing involves contracting out certain value chain activities to outside specialists and
strategic allies. Outsourcing an activity should be considered when,

It can be performed better or more affordable by outside specialists.

It is not crucial to achieving a sustainable competitive advantage and wont hollow out
capabilities, core competencies, or technical know-how of the firm.
It improves organizational flexibility and speeds time to market.
It reduces a firms risk exposure to changing technology and/or buyer preferences.
It allows a firm to concentrate on its core business, leverage its key resources and core
competencies, and do even better what it already does best.

The biggest danger of outsourcing is that a company will farm out the wrong types of activities
and thereby hollowing out strategically-important capabilities that ultimately leads to reduction
of the firms strategic competitiveness and long-run success in the marketplace.

Companies in all types of industries have elected to form strategic alliances and
partnerships to complement their accumulation of resources and capabilities and strengthen their
competitiveness in domestic and international markets. A strategic alliance is a formal
contractual agreement in which two or more firms collaborate to achieve mutually beneficial
strategic outcomes based on the following,

Strategically relevant collaboration.

Joint contribution of resources.
Shared risk and shared control.
Mutual dependence.
Kenia Ritka Ayutimur
Disadvantages of a Vertical Integration Strategy point 3-6, Outsourcing
Strategies, Strategic Alliances, The Dangers of Relying on Alliances
It allows firms to complementarily bundle resources and competencies to increase their
competitive effects and value. Collaborative relationships between partners may entail a
contractual agreement; collaborative arrangements involving shared ownership are called joint
ventures. A joint venture is a type of strategic alliance that involves the establishment of an
independent corporate entity that is jointly owned and controlled by the two partners. The most
common reasons companies enter into strategic alliances are
Reasons to enter Strategic
Alliances

Acquire or improve market access via joint marketing

agreements.

Gain economies Expedite development of new technologies or

of products.

Improve supply chain Overcome technical or manufacturing expertise

efficiency. deficits.

Bring together personnel to create new skill sets and

capabilities.
Kenia Ritka Ayutimur
Disadvantages of a Vertical Integration Strategy point 3-6, Outsourcing
Strategies, Strategic Alliances, The Dangers of Relying on Alliances

Alliances are more likely to be long lasting when they involve collaboration with
partners that do not compete directly, a trusting relationship has been established, and both
parties conclude that continued collaboration is in their mutual interest. In other hand, even
though the number of strategic alliances was increasing about 25 percent annually, some 60 to 70
percent of alliances failed each year. The common causes of that failure are,

Diverging objectives and priorities.

An inability to work well together.
Changing conditions that make the purpose of the alliance obsolete.
The emergence of more attractive technological paths.
Marketplace rivalry between one or more allies.

The dangerous aspect on solely relying on alliances and cooperative partnerships is

becoming dependent on other companies for essential expertise and capabilities. Ultimately, a
firm must develop its own resources and capabilities to protect its competitiveness and
capabilities to build and maintain its competitive advantage.