A vertical integration strategy and a corporate diversification Essay

A vertical integration strategy and a corporate diversification strategy - Essay Example First, it can reduce opportunistic threats from the firm's buyers and suppliers by making transaction-specific value-adding investments, e.g., by capitalizing on economies of scale (opportunism-based). Second, the firm can exploit any of its valuable, rare, and costly-to-imitate resources and capabilities, e.g., as part of the processes used to make its end-products (capabilities-based). Third, the firm can take advantage of stable or volatile business conditions to squeeze profits by reducing its costs as much as possible (flexibility-based). The value of adopting any of these three strategies would depend on how rare and costly to imitate these strategies are, whether the firm does something its competitors do not, the degree to which it exercises control, and the variety of uncertainties that it faces. Implementing vertical integration requires a high degree of control, so a functional or U-form organization structure is the most commonly used (aside from a good CEO), a necessity when adopting cost leadership and product differentiation strategies. The expected conflicts that arise from this structure can be resolved with the use of closely-managed budgets and management oversight committees.