Consumer Vertical integration
stages

Raw
Materi
als

Compon
ents Part
Manufac
turing

Final
Assembly

Retail

Consumer

U...
Industry vertical integration stage
Increasing Profitability Through
Vertical Integration
Building barriers to entry
Facilitating investments in specialized a...
Designing Vertical Relationships:
• such relationships may combine benefits
of both :

Market
transactions

Internalizatio...
Designing Vertical Relationships
• Key issues in designing vertical
relationships:
How is risk allocated
between the parti...
Recent Trends in Vertical
Relationships
From competitive contracting to supplier
partnerships, e.g. in autos
From vertical...
High

Different Types of Vertical Relationship

Long-term
contracts

Joint
ventures

Agency
agreements
Spot sales/
purchas...
Arguments Against Vertical Integration
Cost disadvantages
• Company-owned suppliers that have higher costs than
external s...
Alternatives to Vertical Integration:
Cooperative Relationships
• Short-term contracts and competitive bidding
• Strategic...
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Strategic management

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Strategic management

  1. 1. Consumer Vertical integration stages Raw Materi als Compon ents Part Manufac turing Final Assembly Retail Consumer Upstream Industries Downstream Industries
  2. 2. Industry vertical integration stage
  3. 3. Increasing Profitability Through Vertical Integration Building barriers to entry Facilitating investments in specialized assets Protecting product quality Improved scheduling
  4. 4. Designing Vertical Relationships: • such relationships may combine benefits of both : Market transactions Internalization
  5. 5. Designing Vertical Relationships • Key issues in designing vertical relationships: How is risk allocated between the parties? Are the incentives appropriate?
  6. 6. Recent Trends in Vertical Relationships From competitive contracting to supplier partnerships, e.g. in autos From vertical integration to outsourcing (not just components, also IT, distribution, and administrative services). Diffusion of franchising Technology partnerships (e.g. IBM- Apple; Canon- HP) Inter-firm networks
  7. 7. High Different Types of Vertical Relationship Long-term contracts Joint ventures Agency agreements Spot sales/ purchases Informal supplier/ customer relationships Low Formalization Franchises Low Supplier/ customer partnerships Degree of Commitment Vertical integration High
  8. 8. Arguments Against Vertical Integration Cost disadvantages • Company-owned suppliers that have higher costs than external suppliers Rapid technological change • Tying a company to an obsolescent technology Demand unpredictability • Difficulty of achieving close coordination among vertically integrated activities Bureaucratic costs
  9. 9. Alternatives to Vertical Integration: Cooperative Relationships • Short-term contracts and competitive bidding • Strategic alliances and long-term contracting • Building long-term cooperative relationships – Hostage taking – Credible commitments – Maintaining market discipline • Parallel sourcing policy

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