Companies can raise their overall value as they increase ownership of processes related to their product. Usually this is considered when critical suppliers are late or raise prices. Vertical integration lessens the risk of cost increases, disruption of critical material supplies, and quality problems. The most benefit of vertical integration is the achievement of economies, or cost savings, in joint production, sales, purchasing,and control. The degree to which a firm owns its upstream suppliers and its downstream buyers is referred to as vertical integration. Because it can have a significant impact on a business unit's position in its industry with respect to cost, differentiation, and other strategic issues, the vertical scope of the firm is an important consideration in corporate strategy.
Expansion of activities downstream is referred to as forward integration--to moving higher up in the production distribution process towards the end consumer., and expansion upstream is referred to as backward integration--It is aimed at moving lower on the production process scale so that the firm is able to supply its own raw materials or basic components. As GM and Ford integrate backward vertical integration into component-parts manufacturing in the past, in actual times when these companies are looking at a number of potential global partnerships as it explores growth opportunities around the world, were mainly driven to expand their operations to compete effectively in vehicle industry, all above to add value to its value-chain production lines.
A good option in vertical integration is the taper integration-- allows you to preserve the threat of manufacturing key items yourself without full commitment to the process. You only manufacture a part of the total components needed and outsource the rest.
Capacity expansion is one of the most significant strategic decisions faced by firms. Moreover, the firm must make predictions about future demand, input costs,competitor's behavior and technology. These will be subject to uncertainty. One approach to capacity expansion in a growing market is the preemptive strategy, in which the firm seeks to lock up a major portion of the market to discourage its competitors from expanding and to deter entry. If future demand is known with certainty, for example, and a firm can build enough capacity to supply all the demand, other firms may be discouraged from building capacity. Usually a preemptive strategy requires not only investments in facilities but also in withstanding marginal or even negative short-term financial results.
There are three reasons that capacity might expand in an industry despite overcapacity. The first reason is that some geographic segments are growing faster than average. India and China, in particular, are growing faster than the average world-wide demand and will add capacity to meet local needs. Second, some industry competitors can afford to add capacity under the pricing umbrella of other competitors. This is going on today in North America. Honda is just opening a new assembly plant in Indiana. Honda is operating under the pricing umbrella set by the UAW and its big three auto plants. Third, virtually all industries see capacity expansion through what we call the “learning curve” effect. A plant in operation can become more productive each year simply by learning to do things more efficiently. This increase in productivity causes the plant capacity and, therefore, the industry capacity to increase.
An established firm can enter a new product market through acquisition or internal development. The firm is likely to use internal development to enter markets whose requirements close to the firm’s existing set of resources and capabilities, whereas the firm may turn to acquisitions to enter markets that are far from its current
resource base. The existing businesses might have developed a cost advantage over potential entrants due to their economies of scale. Incumbent firms may erect tactic barriers and cut prices if and when new suppliers enter the market. Some industries have very high start-up costs or a high ratio of fixed to variable costs. Some of these costs might be unrecoverable if an entrant opts to leave the market.
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