Environmental Engineering Reference
In-Depth Information
industry. However, this structure still may be
unstable, because some of the companies, such as
Microsoft and Intel, still tend to use their market
power to expand vertically (Fine & Whitney,
1996). A second example of how organization
culture may affect the vertical integration level
relates to the decisions of vertical integration in
the disk drive industry (Christensen, 1994). IBM,
Control Data, Storage Technology, and Century
Data were extensively vertically integrated into the
design and production of most of the components
and dominated the industry from 1956 to 1985.
In the 1980s, non-integrated entrant firms such as
Seagate, Conner, and Quantum designed drives
in-house but purchased standard components
from the outside and assembled them. Christensen
(1994) finds that disintegration will occur with
component and design standardization. In com-
ponent standardization, several components are
replaced by a single component that can perform
the functions of all of them (Perera et al., 1999).
The integration level of an industry may change as
a result of the affects of technology on the degree
of modularity in design. Christensen (1994) states
that scale economy, the reduction in unit cost as
the size of a facility or scale increases, is another
driving force of vertical integration of industries.
Thirdly, several theoretical studies have shown
that macroeconomic factors affect make-buy deci-
sions of companies. Advanced economies have a
variety of intermediating institutions in place to
address imperfections in the product, labor, and
capital markets such as information asymmetries,
imperfect contract enforcement, and the inability
to enforce property rights. Because these problems
are very costly, firms are expected to be more
vertically integrated in less developed countries
(Khanna and Palepu, 1997; 2000). Moreover, the
instability of certain industries may affect the di-
versification of companies. Diversification and the
level of vertical integration present in the computer
industry changed over a period of time as a result
of changes in the level of competition within the
industry. Results of Chatterjee et al. (1992) sug-
gest that vertically integrated companies “may
be effective at lowering the sensitivity of a firm's
returns to macro-environmental disturbances.”
In addition to these first three reasons, the
make-buy decisions are also determined by market
conditions. Arya et al. (2008) examined a case
when a monopolistic supplier serves both the
firm and its competitor. They demonstrated that
if a company produces in its own facilities then
its competitor is going to be the only customer
of the monopolistic supplier and the supplier will
deliver the input to the competitor on desirable
conditions. Therefore, even though it is costly to
buy from suppliers, under such a condition com-
panies prefer not to produce the inputs internally.
Veloso and Fixson (2001) examined the economic
incentives and constraints and they claimed that the
competition among the assemblers and complexity
of the components affect the make-buy decisions
of automotive assemblers. They noted that in the
case of outside market inexistence, integration
is the best solution. Researchers showed that the
vertical integration level can also be stimulated
by fluctuations in demand by assuming the ex-
istence of market imperfections (Carlton, 1979;
Lieberman, 1991)
Finally, the dynamics of the company also
influence vertical integration policy. The model
developed by Balakrishnan (1994) demonstrates
that “changes in profitability, technological in-
novation, and costs for assets regarding to these
changes” shape the make-buy decisions in the
company.
Resource-Based View
The origins of the resource-based view theory can
be dated back to earlier works of Penrose (1959).
The resource-based view (RBV) theory explores
the firms' performance from the resources and their
implementation side rather than in terms of the
products side (Rumelt, 1984; Wernerfelt, 1984).
Barney (1991, p. 101), referring to Daft (1983),
