Vertical integration is a business strategy that involves a company taking control of its supply chain by either producing goods or services in-house or acquiring companies that produce goods or services it uses. The question of whether to produce goods or services in-house or to buy them from suppliers is known as the “Do or Buy” question.
When making the decision to vertically integrate, companies must consider several factors such as cost, control, and risk. For example, producing goods or services in-house can provide a company with more control over its supply chain and the ability to respond quickly to changes in demand. However, it can also increase costs and risk, such as the costs associated with maintaining and updating equipment and facilities, and the risk of not being able to meet customer demand if something goes wrong in the production process.
On the other hand, buying goods or services from suppliers can lower costs and reduce risk, such as the costs associated with maintaining and updating equipment and facilities, and the risk of not being able to meet customer demand if something goes wrong in the production process. However, it can also reduce control over the supply chain and the ability to respond quickly to changes in demand.
When making the decision to vertically integrate, companies must also consider the industry conditions, such as the level of competition, the availability of suppliers and the level of differentiation of their products or services. For example, in a highly competitive industry with many suppliers and low product differentiation, it may be more cost-effective to buy goods or services from suppliers rather than producing them in-house. On the other hand, in an industry with few suppliers and high product differentiation, it may be more advantageous to produce goods or services in-house to maintain control and ensure quality.
In conclusion, the question of whether to produce goods or services in-house or to buy them from suppliers, known as the “Do or Buy” question, is a crucial decision that organizations must make when it comes to vertical integration. Companies must consider factors such as cost, control, and risk when making this decision. Additionally, they must also consider industry conditions such as the level of competition, the availability of suppliers and the level of differentiation of their products or services. By carefully considering all of these factors, organizations can make an informed decision on whether to vertically integrate and ensure they have the resources they need to meet customer demand and achieve their performance objectives while maintaining a competitive advantage.