Which strategy allows companies to gain the benefits of vertical integration while minimizing its risks?

• A. Reduce production to focus on core competencies
• B. Increase advertising expenditures
• C. Expand into unrelated markets
• D. Engage in long-term contracts with suppliers or distributors

Answer: (D)

Verified step by step guidance

1. Understand the concept of vertical integration: it involves a company expanding its operations into different stages of production or distribution within the same industry, aiming to control more of the supply chain.
2. Recognize the benefits of vertical integration, such as reducing transaction costs, improving supply chain coordination, and gaining more control over inputs or distribution channels.
3. Identify the risks associated with vertical integration, including high capital investment, reduced flexibility, and potential inefficiencies from managing unfamiliar operations.
4. Analyze alternative strategies that can capture the benefits of vertical integration without fully owning the upstream or downstream stages, such as forming long-term contracts with suppliers or distributors.
5. Conclude that engaging in long-term contracts allows companies to secure stable relationships and coordination benefits similar to vertical integration, while avoiding the risks of full ownership and investment.