A Model of Vertical Integration Strategy

by Frederick Webster



The article deals with decisions which relate to the degree of control that ought to exist over input flow and/or finished product flow. The article proposes a relatively simple normative model describing a long-run profit maximizing approach to the implementation of vertical integration programs. The model has certain disadvantages such as it does not provide a panacea for all problem areas inherent in vertical integration strategy, it does not embrace all of the many subtle considerations with which management is concerned, no allowances have been made for exceptional situations that may exist between industries or between firms within the same industry. However, in contrast with these approaches which either have specific applicability to one firm to the exclusion of all others, or become so cumbersome in their attempt to capture every condition and contingency as to become impossible to understand, this model has general applicability for certain firms. It is especially useful to those firms whose product assortments are derived directly from a primary raw material, e.g., petroleum refiners, canners of fruits and vegetables, and processors of forest products.

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