Use code SCNEWCUST15 for 15% off ALL scooters through month-end. Redeem here.
Understanding the Disadvantages of Vertical Integration: A Case Study on Lime's Scooter Business
In today's rapidly evolving urban transportation landscape, Lime stands out as a leader with its dockless electric scooter sharing service. The company has made a strategic business decision to purchase its scooters instead of manufacturing them. This choice highlights a critical disadvantage associated with vertical integration: the burden of large, fixed costs.
What Is Vertical Integration?
Vertical integration occurs when a company takes control of more than one stage in the supply chain. For Lime, manufacturing its own scooters would mean entering the production phase of the supply chain. While this could provide more control over product quality and potentially lower long-term costs, it also introduces substantial drawbacks.
The Disadvantages of Vertical Integration
Large Fixed Costs: The primary disadvantage that Lime would face if it chose vertical integration is the introduction of significant, fixed costs. Building and maintaining a manufacturing facility requires substantial capital investment, not to mention the ongoing costs of labor, raw materials, and machinery maintenance.
Operational Complexity: Managing a manufacturing operation is complex and requires specialized expertise. Lime would need to manage not only the production process but also supply chain logistics, inventory management, and quality control.
Reduced Flexibility: Being tied to a manufacturing facility could reduce Lime's flexibility to respond to market changes rapidly. If a newer, more efficient scooter model is developed by another manufacturer, Lime could be slower to adapt due to its existing investments in its own production line.
Why Buying Scooters Is Beneficial
By opting to buy scooters rather than manufacture them, Lime is avoiding the pitfalls of large fixed costs and maintaining greater operational flexibility. This allows the company to respond quickly to market demands and technological advancements without being tied down by the burdens of production.
Conclusion
Lime's decision to forgo vertical integration in favor of purchasing its scooters illustrates a key disadvantage of the strategy: the introduction of large fixed costs. For companies in fast-changing industries, maintaining flexibility and minimizing fixed expenses can be a more prudent approach. By understanding these dynamics, businesses can make more informed decisions that align with their strategic goals.
