For backward vertical integration into the business of suppliers to be a viable and profitable strategy, a company

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To assess backward vertical integration into the business of suppliers, we need to consider what makes such integration viable and profitable. 
Option 1: 'must first be a proficient manufacturer.' While manufacturing capability is helpful, being merely proficient does not ensure that in-house production will meet the scale, efficiency, and cost advantages of specialized external suppliers. This makes the statement incomplete as a condition for viability. 
Option 2: 'must be able to achieve the same scale economies as outside suppliers and match or beat suppliers' production efficiency with no drop-off in quality.' This option directly targets two core drivers of viability: scale economies and process efficiency, plus quality parity. If in-house production cannot attain these, the cost and reliability advantages of external sourcing persist, undermining profitability. Therefore, this criterion is central to making backward integration credible. 
Option 3: 'must have excess production capacity so that it has an ample in-house ability to undertake additional production activities.' Having excess capacity can be a strategic asset, but it is not a fundamental requirement for viability. In fact, excess capacity can raise fixed costs and lead to inefficiencies if not utilized, so this alone does not guarantee profitability. 
Option 4: 'needs to have a wide product line, so it can supply parts and components for many products.' A broad product line can help justify in-house sourcing for multiple items, but backward integration is not inherently dependent on having a wide product range. Focus should be on the crucial economics of production and quality rather than breadth of offerings. 
Option 5: 'should have a distinctive competence in production process technology and at least a core competence in manufacturing R&D.' While strong capabilities and R&D can support efficiency and innovation, the core viability for backward integration rests more on achieving scale economies and competitive production performance than solely on possessing distinct technical competences. In some cases, even with strong tech skills, without the necessary cost and quality parity, integration may not pay off. 
Collectively, the statements are weighed against the fundamental economic tests for internalizing supply: can the company replicate the supplier’s efficiencies and cost structure and deliver equivalent quality at a lower or comparable total cost? Only option 2 directly addresses these central economics, while the others describe desirable but not definitive prerequisites or outcomes that do not by themselves ensure profitability.

For backward vertical integration into the business of suppliers to be a viable and profitable strategy, a company

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For backward vertical integration into the business of suppliers to be a viable and profitable strategy, a company

View Explanation

Log in for full answers

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