Vertical Integration:
Owning the Channel
Chp. 7 with Duane Weaver
VERTICAL INTEGRATION
• Should only one organization
do all the work?
• Downstream integration
(manufacturer integrates a
distribution function)
• Upstream integration
(channel member such as
retailer may assume its own
brand or product)
• ULTIMATE QUESTION:
Integrate or Outsource??
COSTS & BENEFITS OF VERTICAL
INTEGRATION (VI)
• Degrees of VI (see Fig. 7.1)
– Classical
– Quasi-Vertical
– Vertical
• Costs & Benefits
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Opportunity cost of personnel (from manufacture to distribution)
Lack of channel expertise (underestimation of channel needs)
Insufficient managerial resources
More Control (psychologically appealing), but is it over economic
results
– Increased profit potential
– New Growth Opportunities (e.g. maintenance)
– Amortization of “knowhow” throughout the stream
• Terms of Payment/3rd Parties
– Margin, commission, royalty, future rights or barter
– Exchange of Vertical channel risks in return for increased profit
VI Forward: Economic Framework
• Efficiency
– …to maximize overall efficiency for the long run
(ratio of next effectiveness to overhead- results to
resources)
• Outsourcing as a Startpoint
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–
–
–
–
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Motivation
Specialization
Economically Fittest
Economies of Scale
Heavier Market Coverage
Independence from any single manufacturer
• When Competition is Low
“the accumulation of company-specific assets
creates an economic rationale to vertically
integrate”
– Company specific capabilities (barriers to entry)
– Lack of leverage (threat)
– Opportunism avoidance
Company-Specific Capabilities
• Idiosyncractic knowledge – cannot be readily
redeployed
• Relationships – distributor/manufacturer personnel
expeditious in nature
• Brand Equity – in those instances where downstream
channel members have an influence on the brand’s equity
• Dedicated Capacity – represents overcapacity in
lieu or channel partner
• Site Specificity – e.g. distribution outlet near a remote
manufacturer or manufacturer needing a warehouse in a
market void of distributors
• Customized physical facilities – proprietary hardware
and software and other physical adaptations that binds an
upstream or downstream channel partner (e.g. SHIPPING)
• SWITCHING COSTS – set-up/take-down (1 time)
VI for Environmental Uncertainty
•
When an environment is difficult to
forecast due to dynamics or
complexities. Volatile.
A OR B?
A. Manufacturer should take control to cope
with volatility
(3rd party switching?)
B. Do not commit to any distribution system
until uncertainty is reduced
(litotes difficulty of organization change to
match market volatility).
VI to reduce Performance Ambiguity
• The latter discussions focused on the
failure of a market to produce alternate
bidders, necessitating some VI
(thus you can afford to perform poorly)
• What about: a failure of information?
– Normal:
Bid Monitor  Reconsider  Re-bid
– Performance Ambiguity:
• No baselines to measure against (radically new,
innovative, inability to measure)
• Poor quality measures (untimely, inaccurate)
Summary of Decision Framework
• Fig. 7.3, p. 190
• Fig. 7.4, p. 191
Group Discussion Questions
• P. 196 Questions:
–2
–4
–5
THANKS!
• Have a great day!