Strategic Management: Formulation and Implementation

Vertical Integration

The first strategic change that an organization sometimes makes is to vertically integrate within its industry. The organization can move backward to prior stages to guarantee sources of supply and secure bargaining leverage on vendors; or it can move forward to guarantee markets and volume for capital investments, and became its own customer to feed back data for new products. Each company can have its center of gravity at a different stage.

However, this initial strategic move does not change the center of gravity, because the prior and subsequent stages are usually operated for the benefit of the center of gravity stage. Research findings indicate that the poorest performer of the strategic categories is the vertically integrated by-product seller (Rumelt 1974). These companies are all upstream, row material, and primary manufacturers. Their resource allocation was within a single business, not across multiple products. Significant here is their inability to change, because the management skills-partly technological know-how does not transfer across industries at the primary manufacturing center of gravity.