Last Updated 27 Jul 2020

Balanced vertical integration

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Balanced vertical integration means a company controls all of these components, from raw materials to final delivery that means, for my previous example, that the company may also own a farm or ranch where the food packed is produced. The main causes for vertical intergration include the need for closer control of quality to a higher certainity this comes about because the subsidiary companies have a common quality control system and as such they produce standard products such that the companies are sure of their products' quality as in backward vertical integration.

Another cause is the need to cheapen factor inputs as there are no profit margins. This comes due to inter transactions between subsidiary companies that usually have a central management and a central communication system which is cheaper to use. Moreover, the need for more customer contact as in forward vertical integration, increased market control and better dealings with shortage periods, and competition for example if pub is tied to a brewery it is difficult for someone to set up in competition unless they are also backed by a brewery are other factors that contribute to vertical integration of companies.

This type of situation starts from the production of raw materials all the way to production, then distribution, as it assist the company to control all the lines of business as such controlling entrants to the same business and hence control against competition. The main limitations of Vertical Integration are that monetary and organizational costs increase because managing such a large organizational structure becomes increasingly costly.

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In addition to this, if supply of components is greater than that required by the parent company then either production will have to be reduced (redundancies, industrial action etc) or the surplus will have to be sold to rival firms. Moreover, customer choice may be restricted if the parent company insists on only its products being offered for sale (brewery - note current affairs on the Monopoly's Commission investigation into breweries. ) Vertical integration may not even be necessary to exert control in some cases.

“Vertical integration can be viewed as the extent to which a firm controls the production of its inputs or supplies and the distribution of its outputs or finished products. Over the years, vertical integration was used to achieve different strategic objectives. When the modern industrial enterprise emerged in the late 1800s, companies pursued high levels of vertical integration to realize substantial economies of scale and scope, to eliminate competition, and to reduce market transaction costs” (Chandler, 1962; Williamson, 1985).

This was a discussed consensus view in both parties’ masterpieces. However, Chandler was more of a leading historian of the organizational synthesis for example in sociology, prior to Chandler’s work sociologists assumed there were no differences between governmental, corporate and non profit organizations. Chandler’s focus on corporations’ demonstrated that there were differences in organizational synthesis. His thesis guided organizational sociologists’ work since the 1970, motivating them to investigate and critique.

Thus, a closer overview of Chandler’s, motivated sociologists to investigate and critique it. Chandler assumed American corporations acted for reasons of efficiency (Chandler, 1977) argued that, “modern large-scale firms arose to take advantage of the national markets and productive techniques available after the rail network was in place. He found that they prospered because they had higher productivity, lower costs, and higher profits.

The firms created the "managerial class" in America because they needed to coordinate the increasingly complex and interdependent system. This ability to achieve efficiency through coordination, not some anti-competitive monopolistic greed by robber barons, explained the high levels of concentration in modern American industry. ” This is critiqued by Williamson as he thought corporations operated in the context of politics or conflict.

This is discussed by (Williamson, 2002), as he discusses, The Theory of the Firm as Governance Structure: From Choice to Contract, he quotes: “The principal needs for a science of contract were to the field of public finance and took the form of public ordering: “Politics is a structure of complex exchange among individuals, a structure within which persons seek to secure collectively their own privately defined objectives that cannot be efficiently secured through simple market exchanges.

” Thinking contractually in the public ordering domain leads into a focus on the rules of the game. Issues of a constitutional economics kind are posed (Brennan and Buchanan, 1985). Whatever the rules of the game, the lens of contract is also usefully brought to bear on the play of the game. This latter is what I refer to as private ordering, which entails efforts by the immediate parties to a transaction to align incentives and craft governance structures that are better attuned to their exchange needs. ”

Chandler’s (1977) title sees inefficient practice, with many of the lack of benefits of overextended inflation for example of the 1960’s; he said that internal information and control within a hierarchy may have advantages that outweigh the disadvantage. In contrast, Williamson’s (1975) title famously emphasized “Markets “as the alternative to hierarchy, over the next 35 years, the market disappeared from the literature on firms’ boundaries. Instead, the literature focused on non-integration versus integration at the transaction level, rather than the functioning of the price mechanism at the market level. ”

References.

Brennan, G. and J. Buchanan (1985). The Reason of Rules. Cambridge: Cambridge University Chandler, A. D. (1962). Strategy and Structure: Chapters in the History of the Industrial Enterprise. Cambridge, MA: MIT Press. Chandler, A. D. (1977). The Visible Hand: The Managerial Revolution in American Business. Cambridge, MA: Belknap Press of Harvard University Press. Chandler, A. D. (1969). The structure of American industry in the Twentieth Century: A Historical overview. Business History Review 43 (Autumn): 255-298. Williamson, Oliver. 1975. Markets and Hierarchies: Analysis and Antitrust Implications. New York: Free Press.

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