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Lesson 7 Vertical Integration

This document discusses vertical integration as a corporate strategy. It defines forward and backward integration and examines whether vertical integration can create competitive advantages if it meets the VRIO criteria of being valuable, rare, costly to imitate, and the firm is organized to exploit it. The document also discusses the value of vertical integration in leveraging capabilities, managing opportunism, and exploiting flexibility. It examines the imitability of vertical integration and how firms can organize successful vertical integration through management controls, budgets, board committees, and strategic rewards.

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Nazia Syed
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34 views10 pages

Lesson 7 Vertical Integration

This document discusses vertical integration as a corporate strategy. It defines forward and backward integration and examines whether vertical integration can create competitive advantages if it meets the VRIO criteria of being valuable, rare, costly to imitate, and the firm is organized to exploit it. The document also discusses the value of vertical integration in leveraging capabilities, managing opportunism, and exploiting flexibility. It examines the imitability of vertical integration and how firms can organize successful vertical integration through management controls, budgets, board committees, and strategic rewards.

Uploaded by

Nazia Syed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

Vertical Integration

Corporate Strategy
Saif Ullah Khan
Vertical Chain

Raw
Vertical Integration = FI + BI
Material

Forward Integration Manufacturer


Backward Integration

Distributor

Final Consumer
Can Vertical Integration Create Competitive
Advantage
 Yes, if it meets the VRIO Criteria
1. It is Value able
2. It is rare
3. It is Costly to imitate
4. The firm is organized to take advantage of it.
Value of Vertical Integration

 Market vs. Integrated Economic Exchange


 Markets and integrated hierarchies are ‘forms’ in which economic exchange can take place
 Economic exchange should be conducted in the form that maximizes value for the focal firm. thus, firms assess which
form is likely to generate more value.
 Integration makes sense when the focal firm can capture more value than a market exchange provides.
Value of Vertical Integration
Three Value Considerations

Leverage Manage Exploit


Capabilities Opportunism Flexibility

• Firm capabilities may • opportunism may • internalizing is


be sources of competitive be checked by usually less
advantage in other internalizing Different flexible
businesses Mechanism

• internalizing must • flexibility is


• if not, then don’t be less costly than prized when
integrate exchange opportunism uncertainty is high
Value of Vertical Integration

 Integration vs. Non-Integration


 Firm can create rarity both by integrating and not by integrating.
 Pepsi Vs. Coke
Imitability of Vertical Integration

 Form, per se, can be imitated.


 The value-producing function of integration may be costly to imitate, if:
 The integrated firm possesses resource combinations that are the result of:
1. Historical Uniqueness
2. Causal Ambiguity
3. Social Complexity
 Small Number Prevent Further Integration
 Capital Requirements are Prohibitive
Organizing Vertical Integration
CEO’s Role

Cooperation

Accounting Finance Marketing HR Engineering

Cooperation
Conflict

Original Original Original Original Original


Business Business Business Business Business

New New New New New


Business Business Business Business Business

Conflict
Organizing Vertical Integration

 Management Controls:
1. Cooperation and competition among and between functions.
2. The integration of new businesses into the existing business.
3. Time horizon of managers

Budgets Board Committees


separating strategic and operational Provide Oversight and direction to
budgets managers
Strategic Inputs and Outputs Help ensure that strategic direction is
maintained
Operational Outputs
Organizing Vertical Integration

 Rewards are given on the basis of:


1. Controlling Opportunism
2. Leveraging Capabilities
3. Exploiting Flexibility

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