Make or Buy Decision

It can be in the firm’s interests to source components from their competitors as an enterprise may decide to purchase the product rather than producing it, if is cheaper to buy than make it or if it does not have sufficient production capacity to produce it in-house. Firms use the market mainly because market firms are often more efficient. The main reasons firms choose to source components are that they exploit economies of scale. The reason for this is that other market firms may possess proprietary information or patents that enable them to produce at lower cost or they might be able to aggregate the needs of many firms, thereby enjoying economies of scale. That is why; it is called vertical integration as it is referred to as the degree to which a firm owns its upstream suppliers and downstream buyers. Vertical integration dictates that one company controls the end product as well as its component parts. This is primarily the main reason why Nutriva Group and Vitala Foods (group of grassroots companies) opted for vertical integration. They decided in 2000 to link themselves to health by establishing their own organic feed business. With farm producing eggs from free-range hens and omega-3 milk from specially fed cows, then launched their own food brand and grocery store. In 2009, sales from the Nutriva Group, reached $5 million, and $10 million by 2011. (smallbusiness.chron.com). Vertical integration ultimately creates barriers to entry for potential competitors, especially if the company controls access to some or all of a scare resource involved in production. A company could also opt for it has expertise in each step of the production and distribution process in order to maximize the advantages of vertical integration which...

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.... Horizontal competitors optimize only for the layer they are competing in and so end up being superior to the vertically integrate So, not only did AT&T lose the opportunity to be a great retail ISP, it also lost the opportunity to be a dominant supplier of local access company layer by layer. The reason UUNet succeeded was because it had a high surface to volume ratio. It sold all of its output in a competitive market. It is free to buy all its inputs in a competitive market. The management is not isolated from the markets they compete. (http://blog.tomevslin.com/2005/02/att_lessons_fro.html).

Vertical integration can be a highly important strategy, but it is notoriously difficult to implement successfully and—when it turns out to be the wrong strategy—costly to fix. An organization has to consider each aspect of it before deciding whether it wants to opt for it.