Vertical integration is a risky strategy — complex, expensive, and hard to reverse. Yet some companies jump into it without an adequate analysis of the risks. The authors have developed a framework to help managers decide when it’s useful to vertically integrate and when it’s not. They examine four common reasons to integrate and warn managers against a number of other, spurious reasons. Their primary advice: don’t vertically integrate unless it is absolutely necessary to create or protect value.
1. See, for instance, R.P. Rumelt, Strategy, Structure, and Economic Performance (Cambridge, Massachusetts: Harvard University Press, 1974).
2. H.A. Simon, Models of Man: Social and Rational (New York: John Wiley, 1957), p. 198.
3. O.E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (New York: Free Press, 1975).
4. D.J. Teece, “Profiting from Technological Innovation,” Research Policy 15 (1986): 285–305.
5. See E.R. Corey, The Development of Markets for New Materials (Cambridge, Massachusetts: Harvard University Press, 1956).
6. See K.R. Harrigan, Strategies for Declining Businesses (Lexington, Massachusetts: Lexington Books, 1980), ch. 8.