- The need to provide economic justification, e.g. earning a higher financial return, on adopting an vertically integrated business model (VIBM) as a strategic move for an enterprise.
- Adopting a VIBM can weaken an enterprise's existing competitive strength.
- Adopting a VIBM can increase total business risk for an enterprise with more concentration of investment in a specific industry.
- Subsequent monitoring of financial performance arsing from the adoption of VIBM needs to consider the appropriate transfer pricing design between strategic business units in a VIBM.
- Early pioneerig companies in a new industry find it necessary to adopt a VIBM as there are no/ few outside suppliers. Later on, an enterprise needs to decide if it would be better to reduce reliance on the VIBM (i.e. performs more outsourcing/ external sourcing). There is a need to conduct financial and management accounting evaluation to meet this need for strategic evaluation.
- Transfer prices are used on economic decisions on issues such as the allocation of resources within an enterprise group and whether a particular function should be outsourced. An enterprise should concentrate its resources on those opportunities that create the maximum contribution to profit for the enterprise group as a whole.
The ideas above need to be examined in details from the perspective of how strategic management accounting (SMA) thinking and SMA techniques/ SMA methodologies can support corporate strategic decision making on vertical business integration. Such Management Accounting (MA) systems and efforts to support this kind of strategic decision making can establish SMA as relevant to strategic management in enterprises and rightly earn them the label as "Strategic" MA.
Related diagram
Reference
Ward, K. (1993) "Chapter 10: vertically integrated businesses" Strategic Management Accounting, Butterworth Heinemann
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