CHAPTER 7: Vertical Integration and Outsourcing

This chapter examines the make (vertical integration) versus buy (outsourcing) decision. Firms want to conduct an activity internally if they think they have, or can develop, the capabilities necessary to be among the best in the world at conducting that activity. Two dangers of vertical integration are a loss of flexibility and a loss of focus—which are also the key benefits of outsourcing an activity to a supplier that is vertically specialized. Outsourcing also has its dangers when suppliers develop bargaining power or potentially develop the capability to become a competitor.