Vertical integration is a strategy where a firm takes control over several production or distribution steps involved in the creation of its product or service. A significant disadvantage of this strategy is the loss of strategic flexibility. By committing substantial capital and resources to owning a part of the supply chain, the organization becomes locked into its internal suppliers or distributors. This makes it difficult, slow, and costly to switch to external partners who may offer superior technology, lower costs, or greater innovation, thus hindering the firm's ability to adapt to changes in the external environment.

B. A primary motivation for backward vertical integration is specifically to reduce the bargaining power of suppliers by bringing the supply function in-house.

C. Vertical integration can often enhance an organization's ability to differentiate its product by giving it greater control over the quality of inputs and the customer experience.

D. A key advantage of vertical integration is that it improves control over proprietary knowledge and processes by keeping them within the organization, rather than sharing them with external partners.

1. Grant

R. M. (2016). Contemporary Strategy Analysis (9th ed.). John Wiley & Sons. In Chapter 9

"Vertical Integration and the Scope of the Firm

" Grant identifies several costs of vertical integration

stating

"Vertical integration is disadvantageous when the firm’s needs can be met by a competitive market of independent suppliers... [it] may involve a loss of flexibility... in responding to demand fluctuations and in developing new products and processes" (p. 268).

2. Hitt

M. A.

Ireland

R. D.

& Hoskisson

R. E. (2017). Strategic Management: Competitiveness & Globalization: Concepts and Cases (12th ed.). Cengage Learning. In the discussion on corporate-level strategy

the authors note that a disadvantage of vertical integration is that "the firm is locked into its own sources of supply and distribution channels

reducing its strategic flexibility" (Chapter 6

Section on Vertical Integration).

3. Perry

M. K. (1989). "Vertical Integration: Determinants and Effects." In R. Schmalensee & R. D. Willig (Eds.)

Handbook of Industrial Organization (Vol. 1

pp. 183-255). Elsevier. This chapter explains that vertical integration creates exit barriers and reduces a firm's ability to adapt to new technologies or changing market conditions because of the sunk costs associated with the integrated assets (Section 5.2

pp. 237-239).