What is vertical integration? Discuss the issues that an organisation needs to consider when deciding to vertically integrate or outsource (often referred to as the ‘make’ or ‘buy’ decision). Your answer should include a discussion of the costs involved when vertically integrating/outsourcing and the advantages and disadvantages of vertical integration. You should complete your answer with a discussion of asset specificity, its relationship to vertical integration and hold up problem.

Vertical integration is a strategy adopted by the companies to involve the acquisition of business operations within the same production vertical. For example, a world-famous company “Target" works in the retail industry with a vertical integration strategy. The company offer its own brand products in the store. They manufacture and distribute brand products by cutting out the middleman from channel intermediaries. Thus the company saves the cost of the middleman and get benefit by dealing their customers directly to understanding by their requirements and demands. Furthermore, because of this vertical integration target company is capable to offer their products at lower prices which attracts their targeted customers and results in the increase of their sales revenue. However, vertical integration does not prove as an effective strategy in all cases. Some important considerations are required to be taken in the mind while deciding to vertically integrate or outsource. Vertical integration is associated with a cost-cutting strategy. Organizations make extra profit by lowering the cost of operations. However, in some cases, vertical integration can be relatively more expensive. Thus to avoid such negative consequences managerial staff of an organization need to analyze all possible outcomes of their integration strategy on business in the long run. Sometimes outsourcing can be a better option for the companies rather than vertical integration because vertical integration causes to influence organizational expenditures and reputation in the market. For instance, if a restaurant applies vertical integration strategy and starts establishing farms for required vegetables, poultry, fish, and fruits then it will result in the decrease of a profit margin because the cost of production will be increased unless efficient practices are taken.

Outsourcing is opposite to vertical integration. In outsourcing, companies draw a contract with employees or resources providing firms and execute their business operation with the support of external services providers. Outsourcing is the best solution to take advantage of the external talent when the company do not have skills and required talent in the workforce. Somehow, outsourcing causes to increase hold-up problems for the company. Companies cannot consider outsiders as their internal assets and similarly, assets used in the outsourcing process (owned by the outsourcer) cannot be considered as assets of a company. Such hold-up problems require ownership right which can be provided with the vertical integration strategy. Although, asset specificity also relates to vertical integration. An argument for vertical integration is referred to as asset specificity. The idea behind this asset specificity is that it induces opportunistic behaviour while on the other hand, opportunism preventing cost is controlled by vertical integration.      

There are some advantages and disadvantages of vertical integration and outsourcing which are enlisted below:

v  Vertical Integration

v    Some advantages and disadvantages are presented below in the table to represent the critical analysis of a vertical integration approach for organizations working in the local and international markets.

v  Outsourcing

Outsourcing strategy has some advantages and disadvantages which are presented below in the table:    

Emergent strategy and strategy that has been developed in an intended, designed, deliberate, planned way.

Emergent strategy relates to the identification of organizational outcomes in response to the execution and implementation of the corporate strategy. The key purpose of the emergent strategy is to learn how unexpected outcomes integrate to develop better future plans for the company. Take the example of a company which uses the social website to promote a marketing plan. However, the emergent strategy is mostly in use of organizations to provide a reaction to an uncertain condition.  While on the other hand, the intended strategy is related to the strategy that a company wants to add in the strategic plan. It can be directly focused or sometimes it remains as the indirect but prime factor behind a strategic plan. The strategy a company follows up is known as the realized strategy. In other words, implementing intended strategies are realized strategy for a firm as it relates to the business operations execution. However, another strategy is a deliberate strategy. Deliberate strategy is also a part of the intended organizational strategy. The strategies that the company decided to keep all the same to execute future business operations are known as a deliberate strategy.