Vertical Integration and Corporate Strategy

It is proposed that firms adjust vertical integration strategies according to corporate and competitive needs, varying integration by: 1. the number of processing stages engaged in, 2. the number of in-house activities performed, 3. the amount of output transferred among strategic business units (SBU), and 4. arrangements for ownership or control. Integration strategies are influenced by phase of industry development, industry volatility, bargaining position asymmetries, and competitive strategies. An analysis of data on the relationship between SBUs, gathered from archival industry data, field interviews, and expert opinion surveys, supports the notion of varied integration strategies. SBUs facing uncertain demand engaged in fewer stages of processing and fewer in-house activities than did SBUs facing demand certainty. Substantial synergies among adjacent SBUs led to increased output transfers among upstream and downstream units. Under high bargaining power, SBU ownership was unnecessary to ensure vertical control. High levels of ownership were associated with competitive strategies based on achieving high market share.