This paper proposes a deductively derived model to help managers who preside over decisions to integrate or outsource to assess ex ante whether, when and why it might be strategically and competitively important to develop internal capabilities to perform certain activities in‐house, and when it would be sensible and safe to outsource elements of value‐added. Among the paper's conclusions are that the competitive advantage from vertical integration is strongest in tiers of the market where customers are under‐served by the functionality or performance available from products in the market. Vertical integration tends to be a disadvantage when customers are over‐served by the functionality available from products in the market. Vertically integrated firms will therefore often dominate in the most demanding tiers of markets that have grown to substantial size, while a horizontally stratified, or disintegrated, industry structure will often be the dominant business model in the tiers of the market that are less demanding of functionality.
Industrial and Corporate Change – Oxford University Press
Published: Nov 1, 2002
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