Case Sceanrio: Comparing Vertical Integration Strategies
Break up into small groups of three to five people, and discuss the following scenario. Appoint one group member as a spokesperson who will communicate your findings to the class. Read the following description of the activities of Seagate Technologies and Quantum Corporation, both of which manufacture computer disk drives. On the basis of this description, outline the pros and cons of a vertical integration strategy. Which strategy do you think makes most sense in the context of the computer disk drive industry? Quantum Corporation and Seagate Technologies are major producers of disk drives for PCs and workstations. The disk drive industry is characterized by sharp fluctuations in the level of demand, intense price competition, rapid technological change, and product life cycles of only 12 to 18 months. Quantum and Seagate have pursued very different vertical integration strategies to meet this challenge. Seagate is a vertically integrated manufacturer of disk drives, both designing and manufacturing the bulk of its own disk drives.
On the other hand, Quantum specializes in design; it outsources most of its manufacturing to a number of independent suppliers, including, most importantly, Matsushita Kotobuki Electronics (MKE) of Japan. Quantum makes only its newest and most expensive products in-house. Once a new drive is perfected and ready for large-scale manufacturing, Quantum turns over manufacturing to MKE. MKE and Quantum have cemented their partnership over eight years. At each stage in designing a new product, Quantum's engineers send the newest drawings to a production team at MKE. MKE examines the drawings and proposes changes that make new disk drives easier to manufacture. When the product is ready for manufacture, eight to ten Quantum engineers travel to MKE's plant in Japan for at least a month to work on production ramp-up.
Article File 9
Find an example of a company whose horizontal or vertical integration strategy appears to have dissipated rather than created value. Identify why this has been the case and what the company should do to rectify the situation.
Strategic Management Project: Module 9
This module requires you to assess the horizontal and vertical integration strategy being pursued by your company. With the information you have at your disposal, answer the questions and perform the tasks listed:
1. Has your company ever pursued a horizontal integration strategy? What was the strategic reason for pursuing this strategy?
2. How vertically integrated is your company? In what stages of the industry value-chain does it operate?
3. Assess the potential for your company to increase profitability through vertical integration. In reaching your assessment, also consider the bureaucratic costs of managing vertical integration.
4. On the basis of your assessment in question 3, do you think your company should (a) outsource some operations that are currently performed in-house or (b) bring some operations in-house that are currently outsourced? Justify your recommendations.
5. Is your company involved in any long-term cooperative relationships with suppliers or buyers? If so, how are these relationships structured? Do you think that these relationships add value to the company? Why?
6. Is there any potential for your company to enter into (additional) long-term cooperative relationships with suppliers or buyers? If so, how might these relationships be structured?