Strategic Management: Formulation and Implementation

Breadth And Stages Of Integration

Being broadly integrated also offers firms opportunities to capture large profit margins. Firms that engage in several vertical stages for each integrated activity they undertake can enjoy synergies at several diverse levels within their organizations. Particular combinations of the breath of activities integrated, number of stages undertaken, degree of internal transfers, and form of ownership control are more likely to be successful for certain firms than other depending on: (1) the uncertainty surrounded sales growth, industry infrastructure, and other market traits; (2) the likelihood that the industry in question will undergo radical technological change, serve price warfare, or other structural changes causing competition to be volatile; (3) the power of firms to bargain, cajole, or pressure suppliers (or distributors) into performing value adding tasks for them; and (4) firm's strategy needs.

Factors Affecting Vertical Strategies

Four key factors are hypothesized to affect the vertical integration strategies that firms embrace:

  1. force propelling industry evolution and exacerbating demand uncertainty
  2. the nature of competition in the linked industries
  3. the bargaining power of suppliers or distributors (and customers)
  4. corporate strategy requirements.

Vertical integration is not a costless strategy. However, the key to successful use of vertical integration is recognizing when and where it offers significant competitive advantages and forging the necessary vertical linkages without creating excessive risks.