Zara: Success in Vertical Integration
THEORY
What determines if particular activity have to make with a firm and which throught the market? Ronald Case’s answer was relative cost.
This relative cost is composed by transaction costs ( costs of negotiating or monitoring ) and administrative costs ( costs of production and resource allocation ).
If the transaction costs are greater than the administrative costs, obviously the productive activity will be internalized into the firm.
During the nineteenth companies grew in size and scope, absorbing transactions that had previously taken place across markets but by the end of the 90’s large industrial companies reduced their product scope focusing just on their core businesses and outsourcing the rest.
Vertical integration is a corporate strategy which the company seeks to acquire control over own inputs or on their output or both.
Expansion of activities downstream is referred to as forward integration, and expansion upstream is referred to as backward integration.
Vertical integration potentially offers many advantages, for example it improve supply chain coordination, provide more opportunities to differentiate, capture upstream or downstream profit margins, increase entry barriers to potential competitors, facilitate investment in highly specialized assets and last but no least it enable firms to be more responsive to changes in market needs and less vulnerable to competitors.
On the other side, vertical integration has the following disadvantages, capacity balancing issues, potentially higher costs due to low efficiencies resulting from lack of supplier competition,decreased flexibility due to previous upstream or downstream investments, decreased ability to increase product variety, developing new core competencies may compromise existing competencies and increased bureaucratic costs1.
However, internalizing a transaction imposes administrative cost that depends on many factors. First one, differences in optimal scale between different
What determines if particular activity have to make with a firm and which throught the market? Ronald Case’s answer was relative cost.
This relative cost is composed by transaction costs ( costs of negotiating or monitoring ) and administrative costs ( costs of production and resource allocation ).
If the transaction costs are greater than the administrative costs, obviously the productive activity will be internalized into the firm.
During the nineteenth companies grew in size and scope, absorbing transactions that had previously taken place across markets but by the end of the 90’s large industrial companies reduced their product scope focusing just on their core businesses and outsourcing the rest.
Vertical integration is a corporate strategy which the company seeks to acquire control over own inputs or on their output or both.
Expansion of activities downstream is referred to as forward integration, and expansion upstream is referred to as backward integration.
Vertical integration potentially offers many advantages, for example it improve supply chain coordination, provide more opportunities to differentiate, capture upstream or downstream profit margins, increase entry barriers to potential competitors, facilitate investment in highly specialized assets and last but no least it enable firms to be more responsive to changes in market needs and less vulnerable to competitors.
On the other side, vertical integration has the following disadvantages, capacity balancing issues, potentially higher costs due to low efficiencies resulting from lack of supplier competition,decreased flexibility due to previous upstream or downstream investments, decreased ability to increase product variety, developing new core competencies may compromise existing competencies and increased bureaucratic costs1.
However, internalizing a transaction imposes administrative cost that depends on many factors. First one, differences in optimal scale between different