Supply Chain, Diversification and Vertical Integration Essay

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Management

I wouldn't use a formal process to reconcile global integration and national differentiation. Each situation is unique, and you actually have to think each situation through on its merits, and with its own evidence. Some companies have a very decentralized structure, and thus place more emphasis on decision-making at the national level. Other companies have built their strategy on having a high level of product consistency around the world. But a company can approach different products in different ways, too. Pepsi is the same around the world, but a lot of that company's other products are handled at the national level. So you can't have a formalized process, you have to use evidence to make your decisions, and make them individually. Maybe I don't understand the question, but making decisions means gathering information and then making the decision that enhancing the value of the company the most.

Location is irrelevant. Information is king, and information can go anywhere. You can literally make the decision on a yacht off the Bahamas or in a Calcutta slum. It makes no difference where you are when you make a decision. You gather the information you need to make the best decision possible. If you need the input of others, that's what video conferencing is for. In 2015, location doesn't mean much. With a laptop and a smartphone, you can do just about anything remotely, including making product decisions.

Discussion Board 2

Porter's national diamond is comprised of the following four elements: firm strategy/structure/rivalry, demand conditions, factor conditions and related industries (QuickMBA, 2010). These are things that contribute to a country's level of comparative advantage. Factor conditions are things like resources, technology base, size of the labor force (and its quality). The United States, for example, has tremendous national resources, a great technology base, and a large workforce. Canada has the first two, but the market is smaller, so the U.S. would in general have an advantage. But Canada is competitive globally, because most countries are smaller, don't have its resources, and are less technologically-advanced. Factor conditions have great explanatory factors why some countries -- especially tiny, remote ones like, say, Nauru, have barely any economy at all.

Demand conditions are related to the size of the market, and its wealth. Porter notes that it is not just size -- a more demanding local market can yield advantage, because firms have to be better in order to succeed. Think of how Scotland got so good as distilling spirits, the Chinese at making noodles or the U.S. At making war machines. Countries that have trend-setting markets often also have competitive advantage in a good -- Italian and French companies still rule fashion, but Asian companies dominate consumer electronics.

Related and supporting industries are important as well. I read a while back that Apple explained why they built iPhone in China -- most of the suppliers are in China. This would naturally give China a cost advantage in getting that work. The flip side of this is why Apple still operates in Silicon Valley -- that is the best place to attract high end talent and capital. Such clusters can provide comparative advantage for countries. It can even work in nearby countries -- think of auto parts suppliers in Ontario or the boom in manufacturing in Mexico along the U.S. border -- the related and supporting industries for U.S. manufacturers are in another country, but it still illustrates the effect.

Firm strategy can also affect comparative advantage. U.S. companies are structured in a manner that allows them to innovate, but also to expand globally. They are encouraged to by the corporate structure that is focused on growth. In other countries, such large corporations are more unusual. In Japan, the government grouped large corporations together to build them into superpowers, increasing the comparative advantage of Japan as a whole.

Discussion Board 3

Vertical integration is when a company buys into its supply chain. Anheuser-Busch owns a giant hop farm in Idaho, for example. Vertical integration has some advantages, for example the company can ensure a stable supply. This was probably important for AB, given how many hops they need each year, and the fact that there are not that many independent hop growers. They basically had to take matters into their own hands. So control over key resources, both in terms of availability and price, is an important benefit to vertical integration. This may also include keeping that asset out of a competitor's hands. Control over the asset means lower risk, too. If the supplier is in a foreign country, it helps to have direct influence with the foreign government, and this is easier when you own the supplier.

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There are disadvantages, however. Suppliers that you own are likely to be less innovative, because they do not rely on innovation to win business. This can have a negative impact on prices and quality over time. Another disadvantage is that the supplier's business might not be as easy to understand -- I'll use the food/beverage processor who buys the farm as an example, because making pasta sauce is an entirely different business than growing tomatoes. This makes the learning curve of a different business a disadvantage of vertical integration. Further, the company reduces its flexibility with vertical integration (Amadeo, 2015). This can be a problem when a country destabilizes, or even when its currency rises, and the firm is not able to switch to another supplier in response, which could put it at a disadvantage. So with greater control there is less flexibility and that can be a disadvantage.

Industry structure can drive the need for vertical integration, but arguably factor conditions are more important. Vertical integration is definitely more viable/valuable in some industries compared with others. Usually, a company would want to vertically integrate when control over critical resources gives it an advantage over competitors. A company might specifically not want to vertically integrate when the competencies involved are quite different -- an example of that would be Apple, which is good at design and marketing, and has no meaningful competency in manufacturing parts or assembling them. So for Apple, vertical integration makes sense because it allows the company to focus on what it is good at. But in other instances, suppliers can be substantially important to a company, such that the company may see advantage in taking control of the supplier. I still think this relates more to factor conditions more than industry structure, though a case could perhaps be made that in an oligopoly vertical integration is more likely to deliver competitive advantage because it can reduce competitor access to key inputs.

Individual Project

Well, vertical integration was just discussed in DB3, so to summarize: the advantages are increased control over key inputs, in terms of price, quality and quantity. This control lowers risk, but it comes at a cost. The costs are that the supplier is less likely to innovate, because they do not have to, and that can be detrimental in the long run to cost and quality. Further, the supplier's business may be too different, and the owner cannot run it as well as independent management would. Furthermore, the increased control comes at the cost of reduced flexibility, as a company is committed to a single supplier that it owns, and cannot switch very easily should something go wrong.

There are a number of diversification strategies. Vertical integration is one, and horizontal diversification is another. Things like brand extensions or unrelated diversification are also diversification strategies. Vertical integration means buying down the supply chain or up the distribution chain. An example of vertical integration would be Fresenius, which is the leading maker of dialysis equipment, but also runs dialysis clinics. Coca-Cola bought its distributors a few years ago, which is another example.

Horizontal diversification is diversifying into a related product or service. PepsiCo owns a number of other beverages besides sodas, which it can distribute through the same channels as soda. It also owns Frito-Lay, which may be interpreted as horizontal or unrelated diversification. It is mostly unrelated, but targets the same customers in much the same way, so it is related in a marketing sense.

Brand extensions are a means of fragmenting a market to create new markets. Light beer is a good example of this, but so is a fast food restaurant that adds a different menu item. McDonalds added pizza in a failed attempt to diversity into the pizza market, not by buying a pizza company but by developing the product in -- house. If this had worked, it would have allowed the company to tap into another market in its industry.

Another form of diversification is unrelated diversification, which provides a different revenue stream. A company may prefer this because it hedges against changes to the conditions of one industry, by operating in two completely different industries. Boeing makes commercial aircraft, but it is also a major defense contractor. Even when the technology is roughly the same….....

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