Question

Multinational enterprises (MNEs) can use vertical integration or tapered integration to organize their supply chain. Discuss what a tapered integration strategy is and what are the benefits of using tapered integration strategy as opposed to vertical integration strategy?

Answer 1

Tapered integration is a mix of vertical integration and market exchange. Here A manufacturer manufactures some of the goods itself and can buy the remaining ones from any independent firms, for supply and distribution. It is done because of the-

• Differences in optimal scale of operation between different stages prevents balanced Vertical Integration
• Strategic differences between different vertical stages creates management difficulties
• Inhibits development of and exploitation of core competencies
• Compounding of risk

Benefits of Tapered Integration:

• Technical economies from integrating processes e.g. iron and steel production

                                —but doesn’t necessarily require common ownership

• Superior coordination
• Avoids transactions costs of market contracts in situations where there are:
  • small numbers of firms
  • transaction-specific investments
  • opportunism and strategic misrepresentation
  • taxes and regulations on market transactions

• get more flexibility

    -- in responding to demand cycles

   -- in responding to changes in technology,

- customer preferences, etc.