Vertical Integration

Abstract

A key strategic decision for managers is deciding on the scope of assets to be owned and controlled by a firm (i.e. what should be owned by a firm and what should be purchased or outsourced?). A vertical integration framework (sometimes also called a make-or-buy framework) provides a structured way to think about such decisions. It helps managers make decisions about which assets and elements of a value chain a firm should own and which they can buy from other firms. This chapter discusses vertical integration’s underlying theory, core idea, depiction, process, insight or value created, and risks and limitations. The chapter also discusses the illustration of Starbucks and applies the steps of vertical integration analysis to this case.