* Vertical integration is a measure of how much of the value chain is done by a given firm (also as a verb to refer to changes)

* There are two (complementary) main ways of subdividing a firm to perform internal analysis & evaluate a firm's strengths and weaknesses:

• Functional area analysis
• Value-chain analysis

* The value chain breaks a firm into its strategically important activities to:

• Understand cost behavior
• Identify existing or potential sources of competitive advantage (i.e., by performing these strategically important activities at a lower cost or better than its competitors)

* Corporate value-chain analysis for each product/business line:

1. Identify major activities
2. Assess strengths and weaknesses; how each contributes to competitive advantage and is it sustainable?
3. Determine linkages within each value chain; look for opportunities to improve
4. Evaluate potential synergies among various value chains (of various business lines, also outside with supplier and channel value chains)

INTERNAL DIAGNOSIS

In either value chain or functional area analysis:

• Subdivide organization into several segments
• For each, identify what is being done, how well it is being done, strengths and weaknesses
• Examine linkages and potential synergies among various value chains & their segments, and/or among functional areas
• Look for opportunities to improve and create sustainable competitive advantages

Diagnosis using either value chain analysis or functional area analysis is very similar; these differ primarily in the way of subdividing the organization (in each case, to make the analysis more practical):