Abstract
Vertical integration as a business strategy involves a firm in undertaking two or more successive stages in the process of converting raw materials into finished goods in the hands of the ultimate consumer. By this means two or more successive technologically distinct production or distribution processes are carried out by a single enterprise. We noted in Chapter 4 (see Table 4.1, p. 55) and in Chapter 7 that vertical integration constituted a significant potential growth path for the firm. In addition to the prospect of growth that vertical integration offers, there is a range of further advantages that may be gained from the adoption of this strategy. In this chapter we shall analyse the nature of these possible advantages, consider the potential strategic drawbacks of such a policy, and examine how management can arrive at an optimal strategy in this area.
Vertical integration … competing with suppliers and supplying competitors. — Robert Heller, The Times, 20 June 1971.
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References
See M. E. Porter, Competitive Strategy (New York: Free Press, 1980) pp. 303–9.
In the case of clutch mechanisms motor car manufacturers fairly early abandoned production of their own requirements, relying on specialist suppliers such as Automotive Products, which now dominates the UK market. Economies of scale in clutch production and assembly appear to be such that there are considerable cost savings for a large specialist supplier operating at a scale of output far beyond that required to meet the needs of a single motor car assembly firm. See Monopolies Commission, Clutch Mechanisms for Road Vehicles (London: HMSO, 1968, HCP 32).
See C. Wilson, The History of Unilever (London: Cassell, 1954) Vol. I, p. 265.
See T. Lester, ‘Tootal’s Vertical Theme’, Management Today, June 1975, p. 49.
R. Heller, ‘Vertical Disintegration’, The Times, 20 June 1971.
See W. S. Howe, Industrial Economics (London: Macmillan, 1978) pp. 199–203.
See P. W. Bernstein, ‘Jonathan Scott’s Surprising Failure at A & P’, Fortune, November 1978, pp. 34–44.
See Financial Times, 3 December 1983.
R. D. Buzzell, ‘Is Vertical Integration Profitable?’, Harvard Business Review, January–February 1983, p. 94.
Hayes and Abernathy suggest that backward integration, too, leads to an inflexible commitment to in-house sources of supply and hence also to a manufacturing as opposed to a marketing orientation on the part of the firm. These problems of integration must again be greater when markets or technologies are changing rapidly, and when it will pay the firm to ‘stay loose’. See R. H. Hayes and W. J. Abernathy, ‘Managing Our Way to Economic Decline’, Harvard Business Review, July–August 1980, pp. 72–3.
See K. R. Harrigan, Strategies for Vertical Integration (Massachusetts: D. C. Heath, 1983) Ch. 1.
Ibid., p. 8.
Sunday Times, 26 February 1984.
See Monopolies Commission, Wire and Fibre Ropes (London: HMSO, 1973, HCP 2) paras 11, 76, 119–20.
See K. J. Blois, ‘Vertical Quasi-Integration’, Journal of Industrial Economics, July 1972, Vol. XX, pp. 253–72.
Quoted in Blois, ibid., p. 269.
See Monopolies Commission, Supply of Electrical Equipment for Mechanically Propelled Land Vehicles (London: HMSO, 1963, HCP 21) para. 705.
See D. Isaac, ‘Harris Queensway’s Flying Carpet’, Management Today, January 1984, p. 56.
See Financial Times, 31 October 1974; and Sunday Times, 5 February 1984.
See G. J. Stigler, ‘The Division of Labour is Limited by the Extent of the Market’, Journal of Political Economy, June 1951, Vol. LIX, pp. 185–93; A. B. Laffer, ‘Vertical Integration by Corporations, 1929–1965’, Review of Economics and Statistics, February 1969, Vol. LI, pp. 91–3; and I. B. Tucker and R. P. Wilder, ‘Trends in Vertical Integration in the US Manufacturing Sector’, Journal of Industrial Economics, September 1977, Vol. XXVI, pp. 81–94.
See Monopolies Commission, British Motor Corporation Ltd and Pressed Steel Company Ltd (London: HMSO, 1966, HCP 46) paras 19, 24 and 44; National Board for Prices and Incomes, Bread and Flour (London: HMSO, 1965, Cmnd 2760) paras 12 and 46; and C. Caulkin, ‘The Drill at Sheffield Twist’, Management Today, April 1975, p. 43.
See Buzzell, ‘Is Vertical Integration Profitable?’, pp. 96–7.
Return on investment is the product of the sales margin and the capital turnover ratio. That is, (profit/sales) × (sales/capital) = profit/capital.
J. T. Vesey, ‘Vertical Integration: Its Effect on Business Performance’, Managerial Planning, May–June 1978, p. 12.
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© 1986 W. Stewart Howe
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Howe, W.S. (1986). Vertical Integration. In: Corporate Strategy. Palgrave, London. https://doi.org/10.1007/978-1-349-18213-8_8
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