Question

A U.S. automobile company sells many of its cars in countries that have lower taxes on corporate profits than the U.S. Why might it be profitable for the automobile company to vertically integrate into the car-retailing business in such countries, rather than contracting with independent car dealers?

Answer 1

Answer:

It will be more profitable to vertically integrate because the company will be able to further reduce its costs.

Explanation:

Profit = Sales - Cost

The lower the cost, the higher the profit (if sales remains the same).

A Vertical integration strategy requires a company to own or control its suppliers (backward integration) or its distributors or retailers (forward integration), and therefore, gain more control over its value chain.

If the U.S. automobile company chooses to vertically integrate into the car retailing business in countries where it sells most of its cars, then it would cut out certain costs, such as the cost of contracting with independent car dealers, which would further improve profitability.

Also, such forward integration into retailing means the company will develop processes along its value chain that will increase the efficiency of its operations.