Vertical Integration and Effective Performance Methodologies - Essay Example

If a firm decides to buy a supplier of its intermediate goods and integrate it into its own structure, the validity of the acquired company’s sales, inventories, payroll, and so forth could be sacrificed. This could lead to the acquired company not being as efficient as before because they are now being analyzed as part of the whole company as opposed to being judged by market factors that determine whether they are successful or not. Additionally, information that translates into the acquired company’s core competencies could be lost in vertical integration.

This is because when a company is operating independently within the market they may be more privy or more “in the loop” to market information that exists. This could make them more capable of adapting to market changes and could also make them more capable of gaining a competitive advantage through things like innovation. An example of information being lost is if, say, a company has its own program for measuring performance and then has to switch to the program of the company that acquired them.

Certain information may not transfer in the same way or maybe considered irrelevant by the absorbing company. In this way, information could get lost in the mix. This is not only true for information but for the organizational culture and structure of the company as well.
Effective Performance Methodologies
Since economic performance is important to any company, implementing performance methodologies that are in line with overall economic performance is crucial to a company’s success. An effective performance methodology should be in line with the company’s overall performance.

In other words, anything that influences a company’s economic performance needs to be accurately measured. Once these measurements are in place, a more accurate assessment of the company’s overall performance will be realized. An effective analogy could be to look at a football game. The goal of a football game is to score more points than the other team. All of the other measurements statistical measurements used in football are secondary. Yet it is also important to find out which of these measurements led to one team scoring more points than another team.

In this way, you can get a better idea of how the team is winning games and focus on improving in those areas that are the most important for success. Finding the optimal transfer price is important because it can help to maximize a firm’s overall profits.