Vertical Integration in Strategic Management

Flexibility

The ability of a firm to undo a strategic decision

Opportunism

The behavior of firms seeking self-interest, often at the expense of others firms, especially in transactions involving uncertainty.

Manage Opportunism

- opportunism may be checked by internalizing - internalizing must be less costly than opportunism

Leverage Capabilities

-firm capabilities may be sources of competitive advantage in other businesses -if not, then don't integrate exchange

Exploit Flexibility

-internalizing is usually less flexible -flexibility is prized when uncertainty is high

Corporate Level Strategy to create value

1) such that the value of the corporate whole increases 2) such that businesses forming the corporate whole are worth more than they would be under independent ownership 3) that equity holders cannot create through portfolio investing

Vertical Integration

The strategy of expanding a firm's activities into different stages of the same production path, such as backward or forward integration.

Rarity of Vertical Integration

The uniqueness of a firm's value chain economies achieved through vertical integration or strategic alliances, which may be difficult for competitors to replicate.

Functional Structure (U-Form)

An organizational structure where functional departments are grouped together, each headed by a senior manager reporting to the CEO.

Budgets/Forecasts

Avoid managerial 'short-termism' by using... 1. participative process 2. reflective of reality 3. use quantitative and qualitative evaluation

Value of Vertical Integration

Leverage Capabilities, Manage Opportunism, Exploit Flexibility

Management Committees

provide oversight and direction to mid level managers to foster cooperation, integration, and balance short vs. long term objectives

Vertical Integration Summary

• makes sense when value chain economies can be created and captured • may allow a firm to leverage capabilities • may be a response to the threat of opportunism as a result of the need to make tsi's • may reduce firm flexibility, which can be an issue when the future is uncertain

What level strategy is vertical integration?

Vertical integration is a corporate level strategy

The basic economic logic of Vertical Integration

Vertically integrate when the benefits outweigh the costs

Forward Vertical Integration

When a firm integrates with a distributor or takes over its subsequent role in the value chain.

Backward Vertical Integration

When a firm integrates with a supplier or takes over its previous role in the value chain.

Value Chain Economies

Cost reductions or revenue enhancements achieved by coordinating and controlling the flow of inputs into the value chain.

Synergies

The combined benefits that result from two or more elements working together, often leading to cost reductions or revenue enhancements.

Imitability of Vertical Integration

The difficulty for competitors to replicate the value-producing function of vertical integration, especially when the integrated firm possesses unique resource combinations.

Management Controls

These mechanisms focus management attention on achieving value chain economies 1. Budgets/Forecasts 2. Management Committees