Discuss the firm capabilities-based explanation of how vertical integration can create value. In your discussion identify the two broad implications of this approach and when, under this approach, firms should engage in vertical integration

What will be an ideal response?

The capabilities-based explanation of how vertical integration can create value focuses on firm capabilities and their ability to generate sustained competitive advantages. This approach has two broad implications. First, it suggests that firms should vertically integrate into those business activities where they possess valuable, rare, and costly-to-imitate resources and capabilities. This way, firms can appropriate at least some of the profits that using these capabilities to exploit environmental opportunities will create. Second, this approach also suggests that firms should not vertically integrate into business activities where they do not possess the resources necessary to gain competitive advantages. Such vertical integration decisions would not be a source of profits to a firm since they do not possess any of the valuable, rare, or costly-to-imitate resources needed to gain competitive advantages in these business activities. Indeed, to the extent that some other firms have competitive advantages in these business activities, vertically integrating into them could put a firm at a competitive disadvantage. Under this approach, a firm should pursue vertical integration into an activity when it has valuable, rare, and costly-to-imitate resources in a business activity, vertically integrate into that activity. If a firm does not have valuable, rare, and costly-to-imitate resources in a business activity and other firms already engaging in this activity do, the firm will find itself at a competitive disadvantage.