Environmental Engineering Reference
In-Depth Information
Vertical Integration
companies versus their counterparts pursuing
other strategies.
The rest of the topic chapter is organized as
follows. “Reasons for Vertical Integration or
Diversification
”
provides background informa-
tion on vertical integration, make-buy decisions,
transaction cost economics, resource based view,
and collaboration in sustainability-focused-
organizational structures. “Vertical Integration
Measurement with Fan & Lang Method” describes
the methodology of Fan and Lang (2000) for mea-
suring vertical integration index. In “Sample, Data
Collection, and Measurement,” after documenting
the sample and data sources, we implement our
vertical integration measure. “Results” presents
the results of the main analysis. “Discussions”
discusses possible explanations for the results.
“Conclusion” concludes and, finally, “Future
Research Directions” presents the future work
suggestion.
Both vertical integration and its absence may
cause significant problems for companies. Sev-
eral researchers have investigated the efficiency
and inadequacy of vertical integration compared
with contractual relations since the 1970s. Buz-
zell (1983) and Harrigan (1983) summarize the
advantages of vertical integration as
•
Reduced transaction costs (e.g. price shop-
ping, communicating design details, nego-
tiating contracts)
•
Power to guarantee supplies
•
Improved coordination of activities
•
Irreplicable products (e.g. superior service
levels, customized development of special
products)
•
Advanced technological capability (be-
cause of increased innovation)
•
Higher entry barriers to the market (i.e.
improved marketing intelligence, product
differentiation advantages, cost or demand
forecast capability)
BACKGROUND
Theoretical and empirical work dedicated to
illuminating make-buy or firm-boundary deci-
sion, has taken a number of different approaches.
Two important perspectives are transaction cost
economics (Williamson, 1985; 1991) and the
resource-based view (Conner, 1991; Barney,
2001). Both theories focus on different factors
to explain make-buy decisions. In this section
we will introduce the concepts of vertical in-
tegration, transaction cost economics, and the
resource-based-view and their implementations
on sustainability-focused strategies. Then we
will explain how these concepts may be useful
in thinking about environmental strategies; we
will point out mainly the studies of Coase (1937),
Williamson (1985), and Barney (1991).
•
Pursuing sustainability-focused corporate
strategies successfully (natural-resource-
based view and transaction cost economics
theories will be discussed in “Resource-
Based View” and “Transaction Cost
Economics”)
as opposed to the disadvantages, such as
•
Capital requirements
•
Unbalanced throughput
•
Reduced flexibility
•
Loss of specialization.
These advantages, disadvantages, and defini-
tions in Table 1 summarize the importance of ver-
tical integration with respect to an organization's
strategic decisions related to production, sourcing,
