Vertical Integration Issues

1
Vertical Integration Issues

• Factors to consider
• Some historical notes
• Alternatives
• Is there a new paradigm?
• Conclusions

2
Factors to Consider

• Strategic fit
• Scale, competency and skill match
• Market structure (barriers, availability of
  complementary assets, capital structure)
• Economics
• Transaction frequency and cost
• Market reliability and feasibility of
  alternatives
• Asset specificity
• Modularity of product architecture

3
Some Historical Notes

• Least profitable attempts were medium size SBUs
  - Hayes and Wheelwright
• Long histories of self-delusion
• Falls of sacred cows
• Trends in transaction costs
• Trade barriers and oligopolies
• Some successful alternatives
• Joint ventures
• Asset ownership
• Franchises and licenses
• Supplier coordination
• Tiered relationships

4
Factors that in general are leading away from
integration

• Information technology and e-commerce
• Past advantages of tariff, pricing, scale and
  oligopolies
• Current advantages of focus, risk management and
  economies of scale and scope
• Internet networks and the virtual supply chain

5
Horizontal Industry Structure with Modular
Product Architecture Computer Industry example,
1985-1995
Microprocessors Operating Systems Peripherals
Applications Software Network Sevices Assembled
Hardware
Intel Moto AMD etc
Microsoft Mac Unix
HP Epson Seagate etc etc
Microsoft Lotus Novell etc
AOL Netscape EDS etc
HP Compaq IBM Dell etc
(A. Grove, Intel and Farrell, Hunter Saloner,
Stanford, from Clockspeed, by Fine)
6
One approach for vertical restructuring - Stuckey
and White