Vertical Integration

From Wikipedia, the free, on-line encyclopedia, comes this:

In microeconomics and management, the term vertical integration describes a style of management control. Vertically integrated companies are united through a hierarchy with a common owner. Usually each member of the hierarchy produces a different product or service, and the products combine to satisfy a common need. It is contrasted with horizontal integration. Vertical integration is one method of avoiding the hold-up problem. A monopoly produced through vertical integration is called a vertical monopoly, although it might be more appropriate to speak of this as some form of cartel. Andrew Carnegie actually introduced the idea of vertical integration. This led other businessmen to using the system to promote better financial growth and efficiency in their companies and businesses.

The article goes on to describe other stuff about vertical integration. Read the whole piece and follow the references and links.

This is more outmoded now. It's important to know about for the vocabulary, and many companies are still vertically integrated. Anecdotal information suggests that many companies are flattening out. They're realizing that vertical integration is not necessarily of greatest benefit. And you can look like a big, vertically integrated company but just be bunch of smaller units, each independent, but agreeing to work together where it is in their interest to do so.

There's no hard and fast rule about what's better. It's all about the enterprise and how things work best for it. In many industries the old value chain that held these vertically integrated companies together has been blown up by the shift to the virtual economy.

You need to think long and hard about how your company should be organized.

What do you think about this? I'd like to know. Post a comment.

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