When and When Not to Vertically Integrate

摘要: A strategy as risky vertical integration can only succeed when it is chosen for the right reasons VERTICAL INTEGRATION be a highly important strategy, but notoriously difficult to implement successfully and -- turns out wrong costly fix. Management's track record on decisions not good.(1) This article intended help managers make better decisions. It discusses vertically integrate, use alternative, quasi-integration strategies. Finally, presents framework making decision. When integrate "Vertical integration" simply means of coordinating different stages an industry chain bilateral trading beneficial. Consider hot-metal production steel making, two in traditional chain. Hot metal produced blast furnaces, tapped into insulated ladles, transported molten form at about 2,500 degrees perhaps 500 yards shop, where poured steel-making vessels. These processes are almost always under common ownership, although occasionally hot traded; several months 1991, Weirton Steel sold Wheeling-Pittsburgh, ten miles away. Such rare, however. The fixed asset technologies frequency transactions would dictate market structure tightly bound pairs buyers sellers that need negotiate continuous stream transactions. Transaction costs risk exploitation high. more effective, lower cost, combine these ownership. Exhibit 1 lists kinds costs, risks, coordination issues should weighed tough part criteria often odds with each other. TABULAR DATA OMITTED Vertical typically reduces some risks transaction requires heavy setup its effectiveness dubious. There four integrate: * too unreliable "fails"; Companies adjacent have power than companies your stage; Integration create or exploit by raising barriers entry allowing price discrimination across customer segments; young company must forward develop market, declining independents pulling stages. Some others. first reason failure most one. "fails" within contracts designed overcome (or impossible) write administer. typical features failed (1) small number sellers; (2) high specificity, durability, intensity; (3) frequent In addition, broader affect all markets uncertainty, bounded rationality, opportunism play special market. None features, taken individually, necessarily signifies (VMF), they present, chances good has failed. Buyers sellers. critical least permanent variable determining VMF. Problems arise one buyer seller (bilateral monopoly) few oligopoly). 2 illustrates possible structures. Microeconomists realized rational supply demand forces alone do set prices volumes deterministically such markets, other …