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Vertical Integration Issues

Vertical Integration Issues. Factors to consider Some historical notes Alternatives Is there a new paradigm? Conclusions. Factors to Consider. Strategic fit Scale, competency and skill match Market structure (barriers, availability of complementary assets, capital structure) Economics

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Vertical Integration Issues

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  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 SBU’s - 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

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