Essentials of Strategic Management by Martyn R Pitt & Dimitrios Koufopoulos

Author:Martyn R Pitt & Dimitrios Koufopoulos
Language: eng
Format: mobi, pdf
ISBN: 9781446290774
Publisher: SAGE Publications
Published: 2012-03-27T22:00:00+00:00

Dynamism in Vertical Strategy Decisions

De-integration and re-integration decisions are part of the ongoing strategy process. Most enterprises conduct a value-chain analysis periodically. When they find excess capacity (slack) in some current activities while being stretched elsewhere, their operations are evidently inefficient. Does the spare capacity offer the potential to subcontract for others, enhancing profits and capabilities in the long term? Or, is the current capacity (and available expertise) well below the anticipated future need, indicating that it may be time to de-integrate?

Cost reduction is often the primary goal of decisions to de-integrate, which is justified if the expected future transaction costs are less than the equivalent internal costs (the reverse of the arguments for integration). However, a differentiation strategy may require an enterprise to perform certain value-adding activities to sustain its reputation, despite the existence of lower cost external providers. A case for re-integration also exists if it has relevant expertise in some activities that can be redeployed in those currently subcontracted.

Internet-enabled electronic communications encourage a form of de-integration called disintermediation – that is, the elimination of distributive activities in supply chains that add significantly to costs, but create minimal value for end users, especially in the downstream chain. Amazon and Dell have eliminated dependence on conventional retail outlets in their business-to-consumer (B2C) supply chains. Major US and European supermarket chains bypass wholesalers and importers to deal directly with farmers and their agents in Africa, South America and Asia, facilitating the global supply of fresh fruit and vegetables in these business-to-business (B2B) supply chains.

Real-time electronic communications allow enterprises, especially those with scale-based strategies, to conduct online auctions to mobilise marginal supply capacity wherever it can be found globally, whenever it is required. Evidently, this partial reversion to (very short term) market mechanisms contrasts markedly with strategies based on long-term trust relationships.

Market mechanisms without co-ordination and limited external regulation make it more difficult to accommodate differences in technical standards or commercial cultures. Hidden costs of miscommunication and misunderstanding arise from language barriers in arms-length transactions. Equally, co-ordinated supply chains generate their own costs, one being a lack of realised flexibility. Decisions about vertical integration and de-integration are an integral part of a coherent strategy to support an enterprise’s mission and head towards its future vision, so should not be subject to short-term whim and opportunism.

LEARNING OBJECTIVE 2

Tensions will persist between (quasi) vertically integrated supply chains and market mechanisms that tend to de-integrate them. Each mechanism will be applied where it seems strategically and operationally appropriate parts of all supply chains, notably in trans-national chains. Complexity is therefore inevitable.

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