Environmental Engineering Reference
In-Depth Information
Table 1. Definitions of Vertical Integration
Author(s), Year
Definitions of Vertical Integration
Porter (1980)
“the combination of technologically distinct production, distribution, selling and/or other economic pro-
cesses within the confines of a single firm. As such, it represents a decision by the firm to utilize internal
or administrative transactions rather than market transaction to accomplish its economic purposes.”
Maddigan (1981)
“describes the firm's strategy of exercising ownership control in the production of products that are
used as inputs to each other.”
Buzzell (1983)
“the combination of two or more stages of production or distribution (or both) under a single ownership.”
Riordan (1990)
“the organization of two successive production processes by a single firm.”
Chatterjee, Lubatkin, & Schoe-
necker (1992)
“puts more of one's eggs in the same basket, it makes the basket stronger, i.e., more able to deal with
the economic and competitive forces that threaten it.”
Davies & Morris (1995)
“the decision by the individual firm on whether to organize exchanges internally (within the firm) or
externally (in the marketplace)”
Reed, Lajoux, & Marsalese (1995)
“occurs when a company buys a supplier (vertical backward integration) or customer (vertical forward
integration) to achieve economies in purchasing or sales/distribution”
Fan & Lang (2000)
“Two businesses are vertically related if one can employ the other's products or services as input for its
own production or supply output as the other's input.”
definitions, we propose the definition of vertical
integration as follows: A firm is classified as verti-
cally integrated if its segments are operating in two
or more different industries and the output of one
industry segment is used as input by succeeding
industry segments. A segment is defined by the
Financial Accounting Standards Board (FASB)
Statement No. 14 as: “a component of an enterprise
engaged in providing a product or service or a
group of related products and services primarily to
unaffiliated customers (i.e. customers outside the
enterprise) for a profit.” As the input-output utili-
zation relationship intensifies, the firm becomes
more vertically integrated; in other words, the
vertical integration level increases. At the ultimate
vertical integration level, the companies perform
nearly 100 percent of their activities in their own
facilities. We can define the segments as unique
locations where the activities take place, such as
factory, warehouse, distribution place, and stores.
companies may prefer to purchase a product or
service via the market. Firstly, the nature of the
product may affect the vertical integration level
since some products require a broad range of
knowledge and capabilities to design and produce
the sub-components.
Secondly, organizational culture may affect
the vertical integration level. There is some
evidence that competitive forces may change
the organizational culture over a long period of
time. Two examples of evidence can be given
from the computer industry. As a first example,
Fine and Whitney (1996) discuss the integration
level differences between Japanese and American
companies due to the differences in their organiza-
tion cultures. From the early 1970s through the
early 1980s, the computer industry had a strong
vertical structure. IBM was dominant in this
industry. Since IBM had to maintain its position
in a very broad range of industries, it was hard
to compete with its rivals. As a result, decisions
such as outsourcing some components and the
operating system to Intel and Microsoft changed
the industry dramatically to a horizontal structure.
Since the mid 1980s, the computer industry has
had a horizontal structure instead of a vertical
Reasons for Vertical Integration or
Diversification
The literature has noted five main reasons con-
cerning sourcing decisions, in other words, why
