Vertical integration can be a highly important strategy, but it is notoriously difficult to implement successfully and — when it turns out to be the wrong strategy — costly to fix. Management’s track record on vertical integration decisions is not good.1 Our purpose in this paper is to help managers make better integration decisions. We discuss when to vertically integrate, when not to integrate, and when to use alternative, quasi-integration strategies. Then we present a framework for making the decision.
When to Integrate
“Vertical integration” is simply a means of coordinating the different stages of an industry chain when bilateral trading is not beneficial. Consider hot-metal production and steel making, two stages in the traditional steel industry chain. Hot metal is produced in blast furnaces, tapped into insulated ladles, and transported in molten form at about 2,500 degrees perhaps 500 yards to the steel shop, where it is poured into steel-making vessels. These two processes are almost always under common ownership, although occasionally hot metal is traded; for several months in 1991, Weirton Steel sold hot metal to Wheeling-Pittsburgh, almost ten miles away.
Such trading is rare, however. The fixed asset technologies and frequency of transactions would dictate a market structure of tightly bound pairs of buyers and sellers that would need to negotiate an almost continuous stream of transactions. Transaction costs and the... To read the complete article, login or sign-up using the form below.
Become a premium subscriber today to read this and all MIT Sloan Managmeent Review articles.
Buy this article. Purchase one or more copies of this article in PDF form.
Become a premium subscriber today to read this article and the entire archive of MIT SMR articles.
Upgrade your existing subscription to premium
Sign in if you are a premium subscriber.
Do you subscribe the MIT Sloan Management Review in print? Enter the email address and password you used when ordering. Don't remember? Lookup your subscription account information
- Register for free access to recent articles and the current issue of MIT Sloan Management Review.
- Subscribe and read articles from the past three years online.
- Premium subscription give you access to the entire archive of articles.
