Vertical Integration
Chapter 6
Vertical integration
Definition:
Corporate Strategy is a firms theory of how to gain a competitive advantage by operating in several businesses simultaneously.
Value chain is a set of activities that must be accomplished to bring a product or service from raw material to the point that it can be sold to a final customer
Vertical integration is simply the number of steps in this value chain that a firm accomplishes within its boundaries.
- Backward vertical integration= a firm incorporates more stages of the value chain within its boundaries and those stages bring it more closer to the beginning of the value chain (closer to gaining access to raw material)
- Forward vertical integration= incorporates more stages of the value chain within its boundaries and those bring it closer to the end of the value chain (closer to interacting directly with final customers)
VRIO:
V-the value of vertical integration (the three most influential explanations when v. integration creates value)
- Reduces threat of opportunism (=when firm is unfairly exploited in an exchange)
e.g vertically integrate into exchange (bring exchange within boundary of firm), so that manager can monitor and control instead of relying on the market to manage
= only when cost of vertical integration is less than cost of opportunism
e.g. transaction-specific investment (is an investment that has more value in a particular exchange than any alternative exchanges) =vertical integration is valuable when it reduces threats from a firm´s suppliers or buyes due to any transaction-specific investments a firm has made
- Capability approach: Vertically integrate in business where they possess valuable, rare and costly-to-imitate resources and capabilities
- Flexibility-based approach: do not vertical integrate if value is highly uncertain (rather form strategic alliance)
View example on page. 187-190
R-rarity of vertical integration
A firms vertical integration strategy
Vertical integration
Definition:
Corporate Strategy is a firms theory of how to gain a competitive advantage by operating in several businesses simultaneously.
Value chain is a set of activities that must be accomplished to bring a product or service from raw material to the point that it can be sold to a final customer
Vertical integration is simply the number of steps in this value chain that a firm accomplishes within its boundaries.
- Backward vertical integration= a firm incorporates more stages of the value chain within its boundaries and those stages bring it more closer to the beginning of the value chain (closer to gaining access to raw material)
- Forward vertical integration= incorporates more stages of the value chain within its boundaries and those bring it closer to the end of the value chain (closer to interacting directly with final customers)
VRIO:
V-the value of vertical integration (the three most influential explanations when v. integration creates value)
- Reduces threat of opportunism (=when firm is unfairly exploited in an exchange)
e.g vertically integrate into exchange (bring exchange within boundary of firm), so that manager can monitor and control instead of relying on the market to manage
= only when cost of vertical integration is less than cost of opportunism
e.g. transaction-specific investment (is an investment that has more value in a particular exchange than any alternative exchanges) =vertical integration is valuable when it reduces threats from a firm´s suppliers or buyes due to any transaction-specific investments a firm has made
- Capability approach: Vertically integrate in business where they possess valuable, rare and costly-to-imitate resources and capabilities
- Flexibility-based approach: do not vertical integrate if value is highly uncertain (rather form strategic alliance)
View example on page. 187-190
R-rarity of vertical integration
A firms vertical integration strategy