VERTICAL INTEGRATION AND CORPORATE STRATEGY.

Abstract

Proposing a new look at vertical integration and the dimensions that comprise it, this study develops a framework for predicting when firms use make-or-buy decisions. The strategic business units (SBUs) studied made fewer products and services in-house and firms were engaged in fewer stages of processing when demand was highly uncertain than they did when demand was more certain. Internal transfers from upstream or to downstream business units were more numerous when synergies with adjacent SBUs were substantial than when they were not. Some competitive imitation of vertical integration strategies occurred, and firms with high market shares sought higher ownership stakes in stages of processing adjacent to those markets. Vertical integration involves a variety of decisions concerning whether corporations, through their business units, should provide certain goods or services in-house or purchase them from outsiders instead. Corporations considering vertical integration - one of the first diversification strategies firms consider as they progress from being single-business companies - must make decisions regarding the autonomy of these business units. Most research concerning vertical integration has assumed that savings in the costs of transactions that integration accomplishes supersede autonomy needs of strategic business units (SBUs). According to such an assumption, integrated firms will transfer all of their relevant goods and services to adjacent, in-house business units. However, this paper argues for a dynamic concept of vertical integration in which,the key to effective management is understanding when corporate needs for intrafirm cooperation might take precedence over the concerns of autonomous business units, and when the opposite might be true. The theory developed in this study incorporates the forces of competitive settings and corporate (as well as business-level) strategy needs in a suggested framework for appropriate use of vertical integration. Developing this strategy framework introduces several new dimensions that characterize all vertical integration strategies. My intent is to bridge the gap between economic treatments of vertical integration and activities observed in the histories of several industries; the next section briefly sketches the dimensions of this gap.

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