Vertical Integration Decisions

The research Evidence on the Role of Firm Capabilities in Vertical Integration Decisions (1996) by Nicholas Argyres

The research Evidence on the Role of Firm Capabilities in Vertical Integration Decisions (1996) conducted by Nicholas Argyres explored some criteria for identifying and characterizing firm capabilities. It was aimed at answering the question of when capabilities considerations are likely to be important in vertical integration decisions and suggesting some plausible mechanisms through which such considerations might operate. The paper focused on comparison of the capabilities approach and the comparative contracting approach on make-or-buy decisions made by TightFit, a multidivisional firm producing a wide variety of industrial products for the electronics, telecommunications, aerospace, and electric power industries. The author of the study has found out that “in some cases asset specificity alone is determinant, but in others capabilities and combinations of considerations are explanatory. Analysis of the data also provides insights about the mechanisms through which capabilities operate.” (Argyres 129)

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To my mind, the following points need a closer examination than the one they have in the paper for the reader to get some better understanding of the problem under consideration:

  • TightFit’s decision to outsource the mold design and building activity is explained by the author by the fact that the company does not already possess such a capability in-house. Argyres states that “the company does not build molds, and apparently never has to any significant degree.” (Argyres 137) I believe that a detailed explanation why it is so is needed to better understand the issue, whereas the author points only to some indications in the data that could give a superficial explanation of the fact.
  • What are the characteristics of knowledge that generate differences and similarities between the stable set of activities the firm carries out? How else, except finding out these characteristics, predictive content to the capabilities approach to the firm can be given?
  • What are the possible ways to predict exactly how the markets and technologies for video, voice and data will merge?

I believe that with these points covered the paper would become clearer to the reader.

Matching Vertical Integration Strategies to Competitive Conditions (1986) by Kathryn Rudie Harrigan

K.R. Harrigan’s research was focused on the problem of correlation of vertical integration strategies and competitive conditions. The vertical integrations strategies of 192 firms were explored with the purpose of identifying how successful uses of vertical integration differ from less successive ones.

I am inclined to think that one of the strongest points of the paper is that it combines theoretical explanation of the issue of vertical integration strategies with demonstrating their practical implications. Thus, the reader’s competence increases both in the theoretical and practical spheres of the field at once. The review of the measures past studies have employed to investigate vertical integration and the data used in operationalizing these measures as well as new methods of integration that the author suggests to the reader are important in terms of realizing the theoretical basis of the vertical integration. Each of the core concepts of theory under consideration is exemplified by the researcher. The main dimensions are presented in reader-friendly schemes and tables.

The paper “offers results which could be interpreted to suggest that certain combinations of vertical integration strategy dimensions will be more appropriate than others, and that the key to formulating an effective vertical integration strategy is recognizing when favorable conditions which the firm cannot exploit are present.” (Harrigan 554) I believe that the most important part of the paper is the one where the author outlines implications that the research under analysis has for managers, the latter can resort to the findings of the study to improve performance in different areas.

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Strategy and Structure in the Multiproduct Firm (1987) by Charles W.L. Hill and Robert E. Hoskisson

Three strategies for realizing economic benefits from the multiproduct firm, namely, vertical integration, related diversification, and unrelated diversification become the focus of the research Strategy and Structure in the Multiproduct Firm (1987) conducted by Ch. Hill and R.E. Hoskisson. The study defines economic benefits of the strategies and “links them with the organizational control requirements necessary to realize these benefits.” (Hill and Hoskisson 331) The paper also considers organizational and environmental constraints that can inhibit the realization of these benefits.

While following the authors’ research I experienced some difficulties in understanding the following points:

  • The authors suggest that the best pointers as to the financial economic benefits of unrelated diversification can be found in the markets and paradigms. Are there any other possible pointers? If so, how the research might have benefited from them?
  • What should be done to distinguish easier between the control system necessary to realize synergistic and vertical economies? What coordinating devices other than intangible interrelationships should be used with this purpose?
  • What possible hypotheses can derive from the propositions suggested by the authors? Is empirical investigation sufficient enough for testing them?
  • What implications for practitioners does the research under consideration have?

The authors conclude that “for multiproduct firms, the strategy-structure interaction is more complex than commonly supposed. Different control arrangements within the basic M-form framework are necessary to realize the economic benefits associated with different strategies.” (Hill and Hoskisson 340)

Fisher-General Motors and the Nature of the Firm (2000) by Benjamin Klein

Vertical integration also becomes a focus of another study, that is Fisher-General Motors and the Nature of the Firm (2000) B. Klein, Professor of Economics, University of California, conducted this research to demonstrate the role of vertical integration in avoiding the rigidity costs of long-term contracts. The Fisher Body-General Motors (GM) case served as the basis for this research.

The thing is that the Fisher Body-GM contract for the supply of automobile bodies “broke down when GM’s demand for Fisher’s bodies unexpectedly increased dramatically.” (Klein 1) This resulted in contractual arrangement between the parties outside the self-enforcing range. Fisher took advantage of the fact that GM was obliged to purchase bodies on a cost-plus basis. Vertical integration, with an associated side payment from GM to Fisher appeared to be the most effective way in which the contractual hold-up problem was solved. Klein in his research investigates how the companies benefited from resorting to vertical integration.

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At first sight clumsy and difficult for understanding, this research, in fact, logically presents the author’s points and stresses the most crucial issues of the case. For the reader’s benefit the material is subdivided into chapters which make the study a strictly organized one. Still, the author’s conclusion where he highlights the findings of how a particular contractual arrangement operated seems a bit piled whereas more concrete implications of the study are expected.

Spatial Competition and Vertical Integration

Cement and Concrete Revisited (1983) by Mark E. McBride

M.E. McBride in his research Spatial Competition and Vertical Integration: Cement and Concrete Revisited (1983) reviews the Federal Trade Commission’s (FTC) actions and the debate surrounding them, develops a spatial model of firm behavior accounting for vertical integration and evaluates the FTC actions by empirically testing a performance model of the cement industry.

The model suggested by the author has two significant implications: “vertical integration should be positively correlated […] with the ratio of cement price-to-marginal cost” and “integration should have a negative effect on concrete prices and a lagged negative effect on cement prices.” (McBride 1018) I suppose that the value of this paper is not rooted in these implications only, but in the insights on the cement industry that one can get while following McBride’s explanations as well. It is important because this industry serves as an example of an industry characterized by long-run increasing returns to scale, increasing short-run marginal costs, a low aggregate demand elasticity, and spatial markets.

The author concludes that the strategy of vertical integration allows a firm to increase capacity utilization at the expense of rivals. As far as FTC actions are concerned, McBride deduces that by disallowing vertical integration, the FTC appears to have helped maintain the price inflexibility in cement regional industry.

Works Cited

Argyres, Nicholas. “Evidence on the Role of Firm Capabilities in Vertical Integration Decisions.” Strategic Management Journal 17 (1996): 129-150.

Harrigan, Kathryn Rudie. “Matching Vertical Integration Strategies to Competitive Conditions.” Strategic Management Journal 7(1986): 535-555.

Hill, Charles W.L. and Hoskisson, Robert E. “Strategy and Structure in the Multiproduct Firm.” Academy of Management Review 12.2 (1987): 331-334.

Klein, Benjamin. “Fisher-General Motors and the Nature of the Firm.” The Journal of Law and Economics 2000: 1-24. Academic Unverse: Lexis-Nexis. Web.

McBride, Mark E. “Spatial Competition and Vertical Integration: Cement and Concrete Revisited.” The American Economic Review 73.5 (1983): 1011-1022.

Vertical Integration Decisions
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