Question

Phoenix Guitars is interested in pursuing backward integration to take greater ownership of the extraction of raw materials and production of components used in its signature line of guitars. Although this approach would lower the overall cost of producing a guitar, the costs associated with producing electronic pickups for sound amplification are far greater than those associated with sourcing pickups from a reliable supplier. Which of the following approaches is likely to produce superior results?
A) Invest in vertical integration despite the cost of producing pickups.
B) Abandon the idea of vertical integration entirely.
C) Pursue taper integration.
D) Introduce a budget line of guitars to diversify the firm's offerings.

Answer 1

Answer: A) Invest in vertical integration despite the cost of producing pickups

Answer 2

Answer:

The correct answer is A)

Phoenix Guitars should go ahead with the vertical integration despite the cost of producing pickups.

Explanation:

Why?

Regardless of the cost of producing pickups, the strategy lowers the overall cost of producing a guitar.

Phoenix is in the business of producing Guitars, not Pickups. Therefore the object of this strategy is the entire guitar, not the pickups.

The lower the cost of producing their Guitars, the better maneuverability they have in the market.

Once they have lower costs, they can adjust prices downwards to gain more market share.

The more market share they gain, the greater the number of guitars they will sell. The higher the number of Guitars sold, the higher the profit.

With an increased bottom line, the company can invest in technologies that enable them to produce pickups at a cheaper rate.

Cheers!