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

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)

Horizontal Industry Structure with Modular Product Architecture

Computer Industry example, 1985-1995

Microprocessors

Operating Systems

Peripherals

Applications Software

Network Sevices

Assembled Hardware

6

One approach for vertical restructuring - Stuckey and White