Bridging the gap: state-of-the-art on vertical integration

Abstract

Purpose
This paper aims to present the vertical integration state-of-the-art and propose an expansion of the operations and supply chain management (OSCM) field by identifying gaps and bottlenecks.

Design/methodology/approach
This paper uses a systematic literature review based on a sample of 173 OSCM field articles, collected from Scopus and Web of Science databases.

Findings
There are no single factors, such as future costs, structures or skills development, in the decision to vertically integrate operations. It is necessary to combine the vision of production costs with the perspective of governance and transaction costs. In addition, it is essential to consider the competency perspective and its impact on capability building.

Research limitations/implications
Few studies have attempted to understand how vertical integration is used in terms of OSCM research themes and theories. Vertical integration can help companies face challenges and serve as a potential solution for achieving better prices, demand control and quality management.

Practical implications
The significant role of vertical integration mechanisms in supply chains is crucial for managers evaluating a firm's reconfiguration with more vertical operations. Policymakers interested in supporting the smoothness of vertical integration decisions in regulatory agencies play a key role as contingencies.

Social implications
In times of global challenges, vertical integration is a strategy known to be more effective for firms to obtain a competitive advantage, making them more resilient.

Originality/value
This paper addresses gaps in the vertical integration theme and provides insights for future research development.

Full text

Bridging the gap: state-of-the-art
on vertical integration
Raul Beal Partyka and Ely Laureano Paiva
São Paulo School of Business Administration of the Getulio Vargas Foundation
(FGV EAESP), Sao Paulo, Brazil
Abstract
Purpose –This paper aims to present the vertical integration state-of-the-art and propose an expansion of
the operations and supply chain management (OSCM) field by identifying gaps and bottlenecks.
Design/methodology/approach –This paper uses a systematic literature review based on a sample of
173 OSCM field articles, collected from Scopus and Web of Science databases.
Findings –There are no single factors, such as future costs, structures or skills development, in the decision
to vertically integrate operations. It is necessary to combine the vision of production costs with the
perspective of governance and transaction costs. In addition, it is essential to consider the competency
perspective and its impact on capability building.
Research limitations/implications –Few studies have attempted to understand how vertical
integration is used in terms of OSCM research themes and theories. Vertical integration can help companies face
challenges and serve as a potential solution for achieving better prices, demand control and quality management.
Practical implications –The significant role of vertical integration mechanisms in supply chains is crucial
for managers evaluating a firm’sreconfiguration with more vertical operations. Policymakers interested in
supporting the smoothness of vertical integration decisions in regulatory agencies play a key role as contingencies.
Social implications –In times of global challenges, vertical integration is a strategy known to be more
effective for firms to obtain a competitive advantage, making them more resilient.
Originality/value –This paper addresses gaps in the vertical integration theme and provides insights for
future research development.
Keywords Vertical integration, Strategy, Operations, Supply chain, Review
Paper type Literature review
1. Introduction
In the realm of operations and supply chain management (OSCM), the global landscape is
currently marked by disruptions, external shocks and significant challenges, including crises,
pandemics, geopolitical tensions, overall uncertainty and risk (Koç, Delibas, & Anadol, 2022).
These conditions have necessitated considerable efforts from the OSCM community. We are
© Raul Beal Partyka and Ely Laureano Paiva. Published in RAUSP Management Journal. Published
by Emerald Publishing Limited. This article is published under the Creative Commons Attribution
(CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this
article (for both commercial and noncommercial purposes), subject to full attribution to the original
publication and authors. The full terms of this licence maybe seen at http://creativecommons.org/
licences/by/4.0/legalcode
Funding: This work was supported by the coordination for the improvement of Higher Education
Personnel (CAPES), foundation within the Brazilian Ministry of Education.
Statements and declarations: The authors declare that the associate/thematic editor is from the
same department and business school as the authors.
Bridging the
gap
Received21 March 2023
Revised 13 August2023
15 November 2023
23 January 2024
20 February 2024
Accepted8 March 2024
RAUSP Management Journal
Emerald Publishing Limited
2531-0488
DOI 10.1108/RAUSP-03-2023-0041
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/2531-0488.htm

now facing a phenomenon that has been called deglobalization (also called the renationalization
of production), which can drive companies to embrace vertical integration, a timeless OSCM
strategy. The debate on deglobalization was driven by a wave of technological innovation
moving the world away from one-size-fits-all globalization (Foroohar, 2022), from causes
arising from nationalism, such as Brexit and the US-China trade war, and more recently by the
Covid-19 pandemic (Zhang, Wu, Tang, Feng, & Dai, 2020). As a result of this phenomenon,
companies tend to seek to carry out in-house operations (Ryan, Buciuni, Giblin, & Andersson,
2022). Almost half (48%) of logistics companies are pursuing vertical integration strategies
(Reiss, 2022). These events caused a wave of vertical integration, known to make firms more
resilient to sudden economic crises thence be more effective for firms to obtain a competitive
advantage.
The choice of vertical integration usually considers its effect on internal decision-making
processes (Brahm & Tarzij
an, 2016). When behavioural and environmental uncertainty are
high, contractual governance, via outsourcing, harms the performance of alliances, and
trust-based governance does not work at its best. Under these conditions, it may be better
for companies to resort to vertical integration (Krishnan, Geyskens, & Steenkamp, 2016). On
the other hand, vertical disintegration might be beneficial because it can promote upstream
and downstream competition (Carvalho & Marques, 2014). It should be noted, however, that
the seemingly advantageous strategy of vertical separation may actually be
disadvantageous because it can allow another competitor to enter the market, which reduces
the company’sprofits in the long run (Matsui, 2012).
Vertical integration ensures resource acquisition (Barney, 2002), minimizes opportunistic
behaviour (Williamson, 1985) and mitigates the negative impact of uncertainty (Kogut,
1991). If a company only integrates a small part of its providers, however, and leaves the rest
free, it will not eliminate the chances of opportunistic behaviour and instability, which apply
depending on the size of those left free and/or the possibilities they had of competing against
it. Even if the company does not need non-integrated providers, it can supply the company’s
competition, which will create sources of instability and uncertainty in multinational
companies. (Bucheli & Kim, 2015).
Prior literature described vertical integration as an important strategic priority for
exploring firm-specific knowledge (Armour & Teece, 1980;Wernerfelt, 1984). Companies
are usually faced with a make-or-buy decision (Teece & Pisano, 1994), so choosing a
company’s vertical scope is critical (Williamson, 1971). Vertical integration is more likely
than protecting the firm’simitableresources(Wernerfelt, 1984), especially in high-tech
environments, because this choice is critical to the company’sprofitability due to the
high specificity of the asset and the need for activities to be broadly coordinated
(Monteverde, 1995). Vertical integration, therefore, can improve performance, mainly
because of the coordination benefits associated with internalization (Leiblein, Reuer, &
Dalsace, 2002).
The real effect of vertical integration is driven by better coordination rather than an
attempt to control agency costs (Brahm & Tarzij
an, 2016). It is plausible to affirm that vertical
integration along the supply chain is desirable (Ernst & Kamrad, 2000). Companies may also
integrate and assume monopoly positions in the region where they operate when there are no
direct competitors or they have no incentives to improve. With the recent external shocks,
while some firms needed to raise money quickly, others with slack financial and with potential
growth revenues, took the opportunity to become more vertical (Loeb, 2022).
Although the growing body of literature has made vertical integration more interdisciplinary,
with applications in engineering, healthcare and business, in OSCM, the previous studies are
focused on just one industry (e.g. Young, Swarts, Prior, Doherty, & Campbell, 2022), just one
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OSCM topic (e.g. Bressanelli, Perona, & Saccani, 2019) or limited to partial integration (e.g.
Pishchulov, Richter, & Golesorkhi, 2022). Therefore, the union of some articles would still
represent a limited panorama of vertical integration. Therefore, the aim of this article is to
present the state-of-the-art with an exploratory intention for the fruitful development of vertical
integration research. Specifically, we intend to answer two questions:
Q1. What is the state-of-the-art of vertical integration in the OSCM field?
Q2. How continue to explore thevertical integration debate in the OSCM themes?
Given the interrelated nature of the research questions, a systematic literature review (SLR)
was conducted using two fundamental databases, Scopus and Web of Science. A total of 173
articles were selected, and a content analysis was executed to synthesise the OSCM
literature and to analyse the complexity deeply scholarly and OSCM thematic interaction.
The study also highlights research opportunities, suggestions and research gaps for
possible future exploration.
Not only Covid-19 pandemic, the Russia–Ukraine conflict, US-China trade war and Suez
Canal obstruction are drivers of exogenous shock in supply chains, but multiple social and
political developments lead to frequent and high-amplitude shocks. This research reminds
us that vertical integration is one of the best strategies to apply to firms in scenarios like
these. Roughly, to the best of our knowledge, no study has been reported in the OSCM
literature that examines state-of-the-art and how theories are used in terms of vertical
integration within the OSCM context.
2. Literature review
Vertical integration refers to the consolidation of two or more tiers within the supply chain
(KEK et al., 2022), whether they are suppliers or distributors (Shraah, Abu-Rumman,
Alqhaiwi, & Alsha’ar, 2022), executed within a single business group (Ellram, 1991). This
movement shortens supply chain tiers, coordinating them within the same business group,
indicating the extent to which manufacturing is carried out within the same firm (Olausson
& Magnusson, 2011). Increasing the vertical integration level means increasing the number
of chain activities carried out internally (Saccani, Johansson, & Perona, 2007). Full vertical
integration, moreover, creates an environment in which the company operates almost as a
closed company, performing all activities in the value chain internally with minimal external
links (Rothaermel, Hitt, & Jobe, 2006).
Vertical integration occurs not only in manufacturing processes but also in distribution,
services and business processes (Vallespir & Kleinhans, 2001). It can be classified into at
least two types. Downstream integration enables a manufacturer to better control retail
prices, respond to changes in demand effectively, swiftly adapt to changing consumer
trends (Lin, Parlaktürk, & Swaminathan, 2014) and consequently “getting”closer to its
customers (Baines & Lightfoot, 2014). This decision is related to extending the company’s
domain of activities (Vallespir & Kleinhans, 2001). Upstream integration allows a
manufacturer to exercise greater control over the quality of the supplied material, thereby
improving product quality –a decision linked to focusing on the core business (Vallespir &
Kleinhans, 2001). The processes required for achieving vertical integration include self-
expansion using internal capabilities and the internalization of activities, usually via
mergers and acquisitions (Hashimoto, 2021).
Manufacturing systems resulting from the distribution of work among specialized units
are characterized as low vertical integration units (Nassimbeni, 2003). This occurs between
firms in different echelons of a supply chain and can eliminate the negative influence of
Bridging the
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double marginalization (Gao, 2015;Gunaratne, Krook, & Andersson, 2022;Kouvelis, Xiao, &
Yang, 2018;Lin et al., 2014;Wei, Zhao, & Hou, 2019). Many manufacturers adopt vertical
integration, therefore, to gain competitive advantage (Pi & Li, 2022), allowing them to
control retail prices (Martín-Herr
an & Taboubi, 2015;Wei et al., 2019), manage changes in
demand efficiently and exert tighter control over the quality of supplies and the product
(Wei et al., 2019).
Vertical integration has the potential to hinder coordination of rival products (Zhou &
Wan, 2017). Vertically integrated companies are better insulated from uncertainty during
the deregulation process than non-integrated companies. On the other hand, if they focus
primarily on buying from the wholesale market and selling direct to consumers, they can
quickly adopt the administrative skills they need for writing complex contracts and dealing
with price volatility (Delmas & Tokat, 2005). Vertical integration allows the centralized
authority to be used for coordinating activities that interact intensively. Particularly in more
complex and uncertain environments, therefore, vertical integration plays an important role
because of the need for greater coordination (Brahm & Tarzij
an, 2016).
In times of global challenges, vertically integrated companies upstream are more
successful at withstanding crises (Chong, Wang, Yue Tan, & Cheong, 2014). Although the
concept of complete vertical integration exists, companies are unable to do everything,
depending on raw materials, distribution and delivery to the consumer. If they cannot do
everything and local supply sources are insufficient, they must become more vertically
integrated. (Ettlie & Sethuraman, 2002). Searching for sources globally, in this scenario, is
not an option.
3. Method
This research is classified as a SLR, drawing on various terms found in the literature
(Whittemore & Knafl, 2005) and following a study guide (Durach, Kembro, & Wieland,
2017). According to the recent work by Durach, Kembro, and Wieland (2021), it can be
characterized as a contextualized review, aiming to enhance our understanding of the
contexts, particularly the themes and theories, in which the phenomenon of vertical
integration manifests.
This study begins with an analysis of international scientific production on vertical
integration in the OSCM field. The Scopus and Web of Science databases were used for
operationalization. Supplementary File 1 provides a concise summary of the study criteria,
facilitating potential replication. Figure 1 outlines the selection process to ensure
transparency, reliability and replicability of the findings (Thom
e, Scavarda, & Scavarda,
2016). The search term “vertical integration”yielded 10,897 records. Additional terms such
as “verticalization”,“vertical organization”,“verticality”,“vertical strategy”,“make inside”,
“vertical hierarchy”and “centralized coordination”were also used, but no results were
obtained. Other terms, such as: “vertical coordination”and “internalization”, were also used,
resulting in a total of 31 articles being found. After thoroughly reading the introduction,
method and results, the articles were discarded.
The first filter, focusing on article type, resulted in 8,295 articles. Applying a manual
selection analytical filter specific to journals in the OSCM field, 341 relevant articles were
identified. The final criterion involved confirming that these articles belonged to OSCM
journals. In the database system, a filter was applied to source titles (journals only)
containing words like production, supply, operation(s), logistics, decision, manufacturing,
purchasing, engineering, industrial, scheduling or procurement. We did not discard others.
After this preliminary classification, two sources were consulted to ensure that the identified
journals fell under OSCM categories: the Academic Journal Guide from the Chartered
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Association of Business Schools, focusing on the Operations and Technology Management
and Operations Research and Management Science fields, and Scimago Journal Rank for the
“Decision Sciences”subject area. In a sample of articles, we also verified the “aim and scope”
section of the journal’sofficial website.
Following this, duplicate articles were identified and reduced to one, and an analytical
filter was subsequently applied to ensure that the selected articles specifically addressed
vertical integration as a firm’s decision (excluding decision made by policymakers, for
instance). This process was organized using Microsoft Excel software, leading to the
removal of 36 duplicates. Finally, all articles were thoroughly read in the selection of 173
relevant articles for further analysis (see Supplementary File 2).
4. Results
A timid surge of academic interest is observed (see Supplementary File 3). Until the 2000s,
the most significant number of publications was three articles. This changed in 2007, when
nine publications were registered, surpassing the previous records. The highest incidence of
research in the collected sample occurred in 2014, with 14 publications. Despite the
illustration indicating low numbers, possibly influenced by environmental factors such as
an increased number of researchers, there is no sign of heightened interest in publications
since the number reduced to three in 2017. However, it is essential to note that, even with low
numbers, there has been a greater number of publications after 2014, which may be
attributed to various factors.
Vertical integrationis sought to provide further control of the stages of the chain; nothing
is more plausible than the company holding managerial control and not just ownership. The
pandemic has exposed vulnerabilities in global supply chains. Therefore, we discuss in later
sections why a growth trend in publications was expected from the scenario of external
shocks from 2020 onwards.
4.1 Theories
Articles were classified according to the theories (see Supplementary File 4), with a focus on
those cited twice or more, totalling 132 articles. The most prevalent theory in vertical
Figure 1.
The paper’s search
and selection process
Bridging the
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integration articles is the transaction costs theory (37), constituting more than 21% of the
sample. Game theory (24) and the resource-based view (14) also stand out.
Approximately 30 articles lack a supporting theory, an aspect we will investigate in the
following sections, correlating it with the chosen methods. The related literature on vertical
integration provides a theoretical perspective for the research questions presented in this
paper, with a detailed discussion in Section 5.
4.2 Themes
We classified the themes of the articles in the sample following Tranfield, Denyer, and
Smart (2003) (see Supplementary File 5). The interpretative process to obtain the themes was
guided by the extraction of data from the reading of the main contributions (Tranfield et al.,
2003) and supported by the inductive approach to content analysis, which is the testing and
revising by constant category comparison with the article sample (Seuring & Gold, 2012).
The theme that appears most is supply chain management (51), in more than 31% of the
articles. The second most chosen topic is operations strategy, which appeared in 38 articles,
or approximately 23% of the sample. Third, with 22 articles (13.50% of the articles), was
operations performance. We observe that there are a variety of themes related to vertical
integration in the OSCM field, including emerging themes.
4.3 Methods
We classify the articles based on the method (see Supplementary File 6), whether
quantitative, qualitative or other. On the quantitative side, the most widely used approach
was modelling, with 65 articles, or more than 37% of the total. On the qualitative side, the
case study method appeared in 43 studies, more than 24% of the total. In other methods,
theoretical essays appeared in more than 10% of the total,in 18 articles.
An important point to highlight is the greater number of theoretical articles than studies
using secondary data. We can infer that although vertical integration has been a topic studied
for several decades, some studies are still trying to establish themselves in the field, especially
when we relate to the themes found where there is great diversity and little repetition.
5. Discussion
Based on the results obtained, a range of themes were found to explain vertical integration.
The following text presents the themes found and serves as the basis for the development of
the discussion, future studies and an analytical model.
5.1 Supply chain management
The sample we analysed focused on supply chain relationships that explored the relationships
between buyer and supplier, risk management and distribution channels. Companies in France
and Italy have been modifying their governance and expanding the use of vertical integration.
Food processors that are seeking to establish themselves in the market are planned like French
and Italian supply chains, where food processors have reconsidered their relationships with their
suppliers and moved towards vertical integration (Ghozzi, Soregaroli, Boccaletti, & Sauv
ee,
2016). Both resource-based view (RBV) (as a “potential”superior knowledge) and transaction
cost economics (TCE) (as an opportunistic behaviour) were used, in contrast, to understand the
driver of the governance structure. For the context and location studied, only RBV explained the
option to migrate to hierarchical governance characteristic of vertical integration.
Following vertical integration, supplier and buyer become two units within an integrated
company, which reduces production costs by allowing production managers to centralize
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production scheduling. When considering inventory levels and the cost of goods sold in a
distribution network, the effects of vertical integration alternate over time (Wan & Sanders,
2017). Meanwhile, from inventory theory, although high inventory levels that result from
increased product variety are moderated by vertical integration, it is still unknown which
elements of the inventory strategy firms better manage the relationship between product
variety and its impact on inventory, even before going vertical integration. For example, in a
soft drinks industry, vertical integration has been shown to mitigate the impact of product
variety on forecast bias. An increase in product variety generates 38.89% less inventory
after vertical integration, which is in line with the transparency perspective of vertical
integration, which plays a role in mitigating the impact of product variety and forecasting
on inventory levels (Wan & Sanders, 2017).
In an junction of T CE, RBV, and the relational view, vertical strategies were identified in
the rail sector, typically referred to as intermodal, due to the integration among the port, the
rail operator, and the internal terminal (for example, Hamburger Hafen und Logistik AG).
Railcar ownership is not only a good indicator of the level of vertical cooperation but also
indicates that the transport service itself is recognized as part of the core business (Monios
& Bergqvist, 2016). With a theoretical view, the rail cars are the specific assets, and, not only
as a specificity of the asset (via TCE) or of a specific company (via RBV), being the owner of
the car becomes a good indicator of the level of vertical cooperation and of the existence of
trust and learning within a collaborative environment.
The make-and-buy strategy needs to change as the technology matures, leaving the
most advanced technologies within the vertical structure. There is no doubt between
outsourcing and in-house based on TCE and the theory of growth of the firm, the
company must adopt the very rigorous choice of “doing”during the early days of
adopting the new technology in the manufacturing processes (Perrons & Platts, 2005).
Still on the choice of technologies, these are seen in smaller numbers when in integrated
supply chains, because in vertically integrated companies it is possible to standardize
interfaces and integration between system –already seen in renowned organizations
such as Zara (highly vertically integrated) and Apple (highly vertically disintegrated
technologies) (Bhakoo, Jagat Singh, & Chia, 2015).
In the corrugated cardboard industry (e.g. Field & Sroufe, 2007), vertical integration is
common. Non-integrated companies are both customer and competitor of integrated
companies; that is, non-integrated companies buy paperboard from vertically integrated
companies that produce cardboard and corrugated board and usually generate market
power imbalances, with those that are not vertically integrated operating at a disadvantage.
From reverse supply chain literature, the use of recycled material inputs is expected to be
dominated by non-integrated companies, and with capital costs decreasing over time, the
ratio of independents to integrated companies will increase.
5.2 Operations strategy
Whendealingwithstrategy,wemustthinkintheshort,mediumandlongterm.Ifthereis
(economic) uncertainty in production planning, companies can execute a vertical integration
as a way of remaining competitive and profitable. In addition, from the perspective of agency
theory, manufacturing must be willing to agree on a set of business practices, share pertinent
information and essentially compete as a vertically integrated company (Smith, 2012). But are
rare the vertical manufacturing and performance investigations. Decision-making on vertical
integration is mostly based on cost considerations. However, even eventually reduced, costs
can be easily lost if one considers the increase in transaction costs, thus ignoring the strong
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side effects that outsourcing decisions can have on competence management (another major
factor that influences performance). (Broedner, Kinkel, & Lay, 2009).
Theorists are in full agreement, however, that from core competence view, strategists
should analyse firms in terms of their competence, resources and activity so that they can
more fully address decisions on the upstream and downstream vertical axis (Philpott,
Hamblin, Baines, & Kay, 2004). In terms of TCE, it has also been shown that vertical
integration is utilized when a company seeks to expand its activities, such as through the
franchise system, in the presence of uncertainty regarding the success of the business. On
the other hand, in the path dependence view, with business growth (reduced uncertainty),
one could expect to see market relationships; however, due to the governance structure in
the previous situation, it continues to be used even after the environment changes (Azevedo
& Silva, 2003).
Path dependence has been described in vertical integration strategies in the Japanese
steel industry when, by “always doing it this way”, this industry has virtually integrated
push–pull boundaries. While vertically integrating may involve a large investment in
specific assets (facilities and machinery), this strategy can control all the links in the supply
chain as a single flow and thus maximize cost efficiency. In other words, this leaves a
manufacturer just one step away from its customer, a strategy that enables every confidence
to be placed in the company’s name (Byun and Lee 2015). If TCE has already been
approached as a decision maker before and during a deal, from the point of view of
competitive advantage, especially barriers to market entry, the search for gains with large-
scale production created market generalists, who also have a high degree of integration
vertical (Sabourin, 1999).
There may be an increasing incentive to acquire a foreign facility to control costs, quality
and delivery, or to reduce supplier dependence and facilitate coordination. Every stage in the
physical production of ships in Norway is carried out in a Norwegian shipyard (Semini et al.,
2018). The company’s competitiveness is not only promoted by consumer access but by
vertical integration through ownership, and this satisfies its key customers; however, when
it comes to using TCE, the traditional explanations of TCE (for the vertical integration
choice) did not pay much attention the role of customers, especially understanding customer
needs, satisfying customer needs, providing timely services, creating customer value (Guan
& Rehme, 2012).
5.3 Operations performance
A company will continue to integrate vertically and monopolize an industry if it can
maintain efficiency (Nugent & Hamblin, 1996), namely, maintain cost of organizing
production below the cost of transacting on the market. Would a company’s performance,
therefore, be strengthened by adopting a vertical integration strategy? Vertical integration
may not lead to instant benefits, and managers should not expect rapid improvements in
overall company performance (Wan, 2019). To verify these effects, TCE is related with
vertical integration to imply reduction supply uncertainties to the downstream; therefore,
inter-firm transactions become internal operations. Vertical mergers create higher abnormal
returns; in RBV literature, this implies that investors value mergers that aim to expand the
acquirer’s core competence more than those native of the acquirer; in the logistics sector, in
fact, the acquiring organization can improve capabilities because vertical M&As can lead to
greater positive market reactions compared to horizontal M&As (Liu, Si, & Peng, 2020).
The lower the degree of vertical integration, the greater the cost of implementing product
improvement. This is essentially due to the difficulty of integrating and coordinating
vertically disintegrated chains (Iakymenko, Brett, Alfnes, & Strandhagen, 2022): vertical
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integration can lead to better governance of agency problems, resulting in a better
operational performance (Peltokorpi, Matinheikki, Lehtinen, & Rajala, 2020). From the
claims of contingency theory, the impacts of contingency factors on the performance of the
implementation of changes are still subjective, but such factors could be evidenced through
longitudinal studies following the change since the implementation.
Vertical integration is a means of increasing organizational efficiency, so scholars have
been trying to integrate this topic to extend agency theory (Pellinen, Teittinen, & Järvenpää,
2016). Vertical integration also has a positive effect on raw material inventory turnover,
finished goods inventory and return on sales, but not on volumes of unfinished or in-process
inventory (Andreou, Louca, & Panayides, 2016). Although empirical literature has not
established in absolute terms the relationship between vertical integration and performance,
in TCE view, a higher degree of internal transfers in a vertically integrated firm will reduce
transaction costs and improve information exchange. When observing the airline ticket
market, there was an attempt to improve efficiency with the vertical integration of the ticket
issuer, but there was no evidence that a vertically integrated system of ticket distribution
improved efficiency. TCE theory asserts that there is an incentive to vertically integrate
retailing when costs and difficulties associated with market transactions are significant, but
in an environment that has been fairly stable and traders have been highly regulated, like in
the airline industry, exchanges have not been complex or uncertain; thus, it is not necessary
to reduce the risk of exchanges. (Cheng, Lee, & Shomali, 2012).
As seen, not all findings are the same. IBM’s vertical integration was widely considered a
clear source of competitive advantage, and the flexibility generated by outsourcing the Dell
business model considered a model for companies (Chu, Teng, Huang, & Lin, 2005). Like the
US bicycle industry, which followed the effects of vertical integration, Shimano had a
similar market share to SunTour and Campagnolo. Subsequently, Shimano moved to the
whole product, which generated interdependencies between components. Rival companies
could not respond to Shimano’s move because the new integral architecture reduced the
compatibility of Shimano’s components with those of other competitors, thus creating a
competitive advantage for Shimano (Sorkun, 2016).
From knowledge-based view’s point of view, even in the absence of opportunism,
transaction costs still arise in knowledge-based transactions because, if the information is
not easily transferable between companies, firms tend to be vertically integrated. At the
fashion industry, if all the competitors in an industry outsource, this leads to an
improvement in scale and efficiency. But the world has been supportive of the benefits of
(full) vertical integration, including its ability to increase bargaining power, which is well
represented by the Fordist production model (Kotabe & Mol, 2009). Two Taiwanese
semiconductor companies have used vertical integration to control their need for certainty,
but if competition and demand become too unfavourable, they will face pressure to reduce or
outsource the number of stages they verticalized (Chu et al., 2005). This is a movement that
seems to be more consolidated: the degree of outsourcing is negatively related to the firm’s
performance, and the higher the levels of market uncertainty, the difference is accentuated.
5.4 Operations management
A lot of attention has been paid to deciding whether operations should be verticalized or
contracted from external suppliers (Olausson, Magnusson, & Lakemond, 2009). Companies
in industries around the world that were less vertically integrated in durable goods were
consistently more likely to use overseas sources of supply (Ettlie & Sethuraman, 2002).
While Caplan (1977) questions vertical integration and adopts a much more critical
approach to transaction cost analysis, with make-or-buy decisions guided by a wide range of
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economic and technical considerations, Mixon and Upadhyaya (1995) show that for US
carriers, larger companies have advantages over smaller companies in terms of asset
ownership by theory of regulation, where large firms face lower costs of capital.
For companies in the early stages of operation, when quick responses to market reactions
are crucial, chain coordination cannot be achieved (Chen, Chowdhury, & Donada, 2019).
Companies also face the prisoner’s dilemma that forces them to invest when the development
cost is high despite the level of competition, but the equilibrium that outsourcing can provide,
or the ex ante technological advantage that comes from having independent suppliers were
found (Grahovac, Parker, & Shittu, 2015). In the electricity sector, by scope economies,
generation-only companies generate more than double the amount of electricity when they are
vertically integrated and can choose between manufacturing and purchasing electricity
(Triebs, Saal, Arocena, & Kumbhakar, 2016). Economies of scale were confirmed from vertical
integration in water supply in Portugal, where a single, vertically integrated concessionaire
(responsible for the whole activity, from water production to water distribution) is able to
supply water at a lower cost than several companies that are not vertically integrated (Carvalho
& Marques, 2014). Other than that, the relationship between vertical supply chains and the
environmental performance of vertically integrated chicken producers –rearing, milling feed,
processing and distributing the meat –is not supported by empirical evidence (McCarthy,
Matopoulos, & Davies, 2015). This is similar to the case of the New Zealand dairy industry,
which has developed into a highly vertically integrated system –a farmer-owned cooperative
structure –since mostly family-owned producers supply their cooperatively owned processing
plants with milk (Sankaran & Luxton, 2003).
5.5 Operations service
Evidence from the transport sector indicates that there may be important factors within the
nature of the industry that have an impact on the buy-or-make decision. Among the suggested
factors to investigate in these service operations are the level of competition, the degree of
government regulation and the maturity of the industry; besides, combined (transaction and
production) costs must be considered (Bienstock & Mentzer, 1999). Carriers are moving
beyond transportation and becoming involved with storage. Even though the larger carriers
are more likely to offer storage in their own buildings when using their own employees,
expertise and location become a big factor in warehouse efficiency. As a result, they prefer
owning the assets rather than entrusting them to third parties (Hanna & Maltz, 1998).
The traditional model ofvertical integration found in the manufacturing industry, with its
focus on design and production, is rarely seen in service operations (Baines, Lightfoot, &
Smart, 2011). Social interaction tie’s view, in response to the autonomy of physicians and the
complexity of health service processes, hospitals are increasingly applying vertical
integration strategies by employing physicians to provide services. This is because many
physicians who work in hospitals may have jobs in addition to their hospital job; they may
work there in an outsourced capacity and may have other remuneration and objectives that
differ from those of the hospital (Dobrzykowski & Tarafdar, 2015). In less vertically
integrated companies, the exchange of information and transactions with suppliers increases,
as does the speed at which cost savings are realized, but there is no evidence that integration
significantly influences customer satisfaction (Xue, Ray, & Sambamurthy, 2013). Therefore,
while the existing literature on transaction costs still does not examine the evolutionary
dynamics of the industry (how and why transaction costs are reduced), it is necessary to
consider in the models the evolutionary dynamics of the industry, where service operation
strategies are not only statically determined by transaction costs but also by information
asymmetries and differences in capabilities and resources between companies.
RAUSP

5.6 Production scheduling
Vertical integration has a positive effect on observed production; that is, it improves
production efficiency (Lin & Chiang, 2011). Dotoli, Fay, Mi
skowicz, and Seatzu (2019)
contribute to the findings by stating that vertical integration of manufacturing plant
automation systems contributes to at least three requirements:
(1) flexibility, with respect to lot size;
(2) flexibility, to the reconfiguration of supplies; and
(3) reliable communication across heterogeneous systems.
Factory automation management requires supply chain integration, standardization,
specialization and learning effects (Jonsson, Rudberg, & Holmberg, 2013). As the example of
IKEA (a Swedish multinational furniture company), which has a fully integrated downstream
chain, in addition to many suppliers having IKEA as their only or main customer, including
some that are partially or fully owned by IKEA.
5.7 Quality management
“Centralized decision making is an effective way to obtain high quality products”(Xie, Yue,
Wang, & Lai, 2011, p. 407). Vertical integration also benefits situations in which quantity
and quality are lost in the fresh agri-food produce sector because they are highly perishable
products, or where service sensitivity is high (Orsdemir, Hu, & Deshpande, 2019). Vertical
integration can be seen as an alternative strategy for corporate, social and environmental
responsibility (CSER) in sourcing when conventional approaches such as auditing are
ineffective. Because vertical integration does not generate any distortion of efforts –as
occurs in vertically separated firms –the upstream and downstream R&D efforts are
aggregated, as is the existing level of quality itself (Lambertini, 2018).
To investigate how decide on quality investment and price decision in a make-to-order
supply chain with uncertain demand, based on the preference theory, centralized decision-
making is an effective way to achieve high-quality of products. As consumer preferences for
high quality products increase, manufacturing more high-quality products is advantageous
for companies. When the average consumer quality standard reaches a certain level, it may
be more beneficial for an industry to offer premium products if other companies in the same
industry choose to stop producing inferior products (Han & Liu, 2020). A supply chain that
adopts a vertical integration strategy tends to provide “high quality, high price”products,
which is a good choice when the focus is on end consumers (Xie et al., 2011).
Vertically integrated companies are uncommon in the European meat industry, even though
vertical integration is the most traditional way of dealing with quality uncertainty. It is
estimated that players in this industry prefer to invest in partnerships. According to
coordination theory, the coordination of information and basic rules may be outsourced, while
production and marketing are coordinated through the open market (Bahlmann & Spiller, 2009).
In a highly competitive market, retailers are concerned with the relationships they have
with suppliers, which are also retail competitors, as they ensure the supply of high quality
products (Hingley, 2001), such as in the production of fresh food products, for example. In
other words, importance is given to a hierarchy of retailers. Because of perishability, quality
and risks arising during the coronavirus pandemic, it has become clear that to build a
supply chain that is highly resilient to risks, by dynamic capabilities, firms were more
resilient when opting for vertical integration and thus adopting strict quality control. It
occurred in the domestic furniture market in Japan, which achieved vertical chain
integration by adopting strict quality control (Ishida, 2020).
Bridging the
gap

5.8 Sustainability
From a CSER perspective, vertical integration may be economically justifiable as it
improves the livelihoods of people in developing countries (Orsdemir et al., 2019). Nike,
Nutella and Zara are classic examples of this. As product circularity, the vertical integration
of disassembly units and scrap processing and shredding communities helps contain price
fluctuations and so helps in a closed-loop material flow in the vehicle industry. Toyota
(Japan) has partnered with scrap metal dealers and other vehicle manufacturers to dismantle
and form a company to recycle materials from automobiles (Mohan & Amit, 2021). In the
home appliance supply chain, a high degree of vertical integration by one element in the
supply chain is not a situation that is suitable for implementing the circular economy
(Bressanelli et al., 2019).
Partial vertical integration, following the principles of lean, reduces energy consumption
and carbon dioxide emissions in the chain (in the Indian context), while complete
integration, in addition to the increased benefits to the partial integration factors, reduces
lead times and results in cleaner production with reduced lean waste (e.g. waiting, inventory,
movement and quality) and green waste (e.g. energy, water, waste and transport) (Sultan,
Routroy, & Thakur, 2021). When thinking about the community, vertical integration is an
efficient structure, although from a perspective that evaluates the environment, the
investments do not translate into sufficient reduction efforts to compensate for the polluting
effect of the large volume of production, leading to a degraded environment that cancels the
social welfare benefit(Sim, El Ouardighi, & Kim, 2019). In the metal coating supply chain,
vertical integration concentrates processes in large companies, from the production of paints
to the application of coating materials, which requires an optimization of procedural
processes and recycling cascades (Geldermann, Schollenberger, & Rentz, 2004).
5.9 Emerging issues
Faced with the common sense dictum of “don’t outsource what’s going to generate a lot of
money”, there is a fundamental principle to apply here: those who control the interdependent
links in a value chain obtain the most profit(
Christensen, Smallman-Raynor, & Verlinden,
2001). From behavioural operations, we can extend the literature flow and provide a clear
understanding that the change in the governance mode is a de facto choice, as well as a
change in supplier, or a strategy re-assessment (Foerstl, Franke, & Cataldo, 2021). From the
perspective of the theory of planned behaviour, Foerstl et al. (2021) carried out an
experiment looking for the effects of pressure and the mimetic attitude of managers on the
decision to internalize operations. Given increasing investment in the strategy of
internalizing operations, companies still do not have full knowledge of the behavioural
biases of their managers’decision-making. There is evidence that supply chains are not
always rational because managers’attitudes have an influence on the decision to internalize.
Team behaviour (attitudes and feelings) and its effect on the intentions and the decision to
verticalize are still uncertain and need further investigation.
Throughout economic history, a common link has been suggested between the level of
vertical integration and the rate of innovation (Gadde, 2013). From an innovation point of view,
therefore, a vertical integration network and strong market share capabilities are capital, while
a lack of resources and capabilities forces companies to adopt a more flexible form of frugal
innovation just to survive (Lu, Chang, Rong, Shi, & Yu, 2019). Vertical integration maintains
control over the product internally, which is why projects with high levels of vertical
integration are two and a half times more likely to implement “green”systemic innovations
even after controlling for the cost of innovation (Hall, Whyte, & Lessing, 2020). The firms that
have broken their dependence on specialized industry knowledge have developed systemic
RAUSP

innovations to capture value from digital manufacturing technologies and consequently
obtain a competitive advantage. Although industries with specialized assets can eliminate
inefficiencies due to imperfect competition and save on transaction costs, entry and the
number of competitors have a relatively greater impact on vertical integration levels than
technological rivalry (Balakrishnan, 1994).
We have confirmed that vertical integration is a facilitator of new product development
(Hall et al., 2020). Competition between companies has its stages. When the product is
launched, companies compete for development and performance. As customer needs are
met, competition for flexibility, pricing and differentiation comes into the picture. It is well
known, however, that subcontractors and even service providers are often low-level
suppliers; that is, they are rarely involved in complex processes such as new product
development. (Spina, Verganti, & Zotteri, 2002). Entrepreneurial actions of a product
introductory stage led to vertical integration due to strong uncertainties and asset specificity
needs. An exception to this occurred when Tesla, which is increasingly verticalized,
outsourced its battery manufacturing process to Panasonic, but it was almost a vertical
franchise since theconstruction decisions were all Tesla’s(Chen et al., 2019).
Even in situations where manufacturing is entirely outsourced, it seems necessary to
keep certain manufacturing competences in-house (Olausson & Magnusson, 2011), because
the product may not be good enough and, therefore, being a vertical company is essential for
success (Christensen et al., 2001). Looking for learning from operations over time,
manufacturing companies experience higher long-term costs when they choose to outsource.
When purchasing components (market hierarchy), the manufacturer learns less about
component production and system integration, which increases the manufacturing and
integration costs; the lessons learned reduce over time, so if the manufacturer decides to go
to market again, it will no longer have any experience of in-house manufacturing (Anderson
& Parker, 2002).
6. Future research directions
To deepen our understanding of vertical integration, we propose a research agenda for each
of the areas that emerged from the content analysis, as summarized in Table 1. We applied
an aggregative and interpretative approach, drawing on themes in the OSCM field and
highlighting and establishing readiness contributions, as suggested by Tranfield et al.
(2003). We present aggregated results from the analysed articles in a more comprehensive
way, which could support future, more extensive theoretical work on vertical integration. In
addition, we pose new questions critical for advancing the theorizing on the topic.
The findings reveal and expose the value of vertical integration operations strategy for
literature, theory and practice. From a theoretical standpoint, “there is no general theory for
vertical integration”(Chan & Reiner, 2019, p. 280). For TCE, the question of whether an
activity is economically viable for vertical integration or not depends on the specificity of the
assets needed to carry out that activity. On the other hand, from resources (or competence)
based view, the company is considered as a resource box and, therefore, it is likely that it
will develop and grow based on existing competences by expanding rather than acquiring
the substantially different competences needed for new activities. Although the lack of
competition in the segment may facilitate a greater level of vertical integration, in the
context of carriers, there is no support for the TCE uncertainty argument between using
employee operators or market operators (C. Han, Corsi, & Grimm, 2008). There is a certain
inducement for manufacturers of specialist products to use vertical integration more often
than market relationships. Even with the contributions of TCE, industries that manufacture
specialized products generally experience high levels of transaction costs and are therefore
Bridging the
gap

Theme Aggregative result Suggested research questions
Supply chain
management
RBV explained the option to migrate
to hierarchical governance, a
characteristic of vertical integration
Vertical integration, by centralizing
production scheduling, reduces
production costs
High inventory levels resulting from
increased product variety are
moderated by vertical integration
The greater variety of products
offered reduces the amount of stock
after adopting vertical integration
Technologies are seen in fewer
numbers in integrated supply chains
as it is possible to standardize
interfaces
In highly verticalized industries, there
may be an imbalance of market
power, with non-integrated companies
What the vertical integration effects
on inventory levels? And one the cost
of goods?
Which elements of the inventory
strategy companies best manage the
relationship between product variety
and inventory, even before vertical
integration?
How to reach the advanced level of
technology within vertical chains?
How can the circular economy work
together with non-vertical companies,
to balance market power, to increase
responsibility for processing inputs
from recycled material?
Could capital costs increase the
chance of independent chains
becoming increasingly vertical?
Operations
strategy
Under economic uncertainty (e.g.
franchising), vertical integration is a
means to keep companies competitive
and profitable
Customer confidence and cost
efficiency are a result of vertical
integration, as well as bringing
manufacturing just one step away
from the customer
The quest for scale gains created
market generalists, who have a high
degree of vertical integration
What are the guidance factors to
decision-making for vertical
integration besides cost aspects?
In an environment of reduced
uncertainty, through organic business
growth, vertical integration is also
used as an extension of economic
uncertainty
Operations
performance
Performance effects are not
instantaneous
Equity returns are higher in vertical
mergers due to greater appreciation of
investors due to the expansion of
capacities
The lower the degree of vertical
integration, the higher the cost of
implementing product improvements
Vertical integration improves the
governance of agency issues, resulting
in better performance; coordination and
information exchange
Which contingent performance factors
are improved (or not) after vertical
integration?
What are the longitudinal effects in
the field of performance with respect
to contingency? And for TCE?
What aspects, contexts and
characteristics of unregulated markets
impose the need for vertical
integration?
When is a high degree of vertical
integration beneficial?
(continued)
Table 1.
Summary of
proposed research
agenda
RAUSP

Theme Aggregative result Suggested research questions
Regulated sectors do not have complex
or uncertain exchanges, reducing the
need for vertical integration
Operations
management
From regulation theory, larger
companies have advantages in
owning assets and, therefore, lower
capital costs
Companies in the initial stage of
operations cannot coordinate the
chain
Due to the prisoner’s dilemma, given the
cost of investment, companies can
balance outsourcing or having
independent suppliers
Vertical integration provides scope
and scale economy gains
How can vertical integration be used
to pursue environmental concerns?
Operations
service
Asset specificity is the most common
explanation reason via TCE for
vertical integration
Hospitals are increasingly using
vertical integration to configure
doctors with an exclusive role in the
hospital
What is the response to uncertainty
and frequency in the services sector
regarding TCE?
How after-sales it is configured in the
supply chain?
In smaller companies, the greater ease
of communication and suppliers’
relationship makes vertical integration
unfeasible
Production
scheduling
Vertical integration of manufacturing
plant automation systems contributes
understanding of an efficient vertical
information flow in factories must be
improved
What are the requirements for
manufacturing plant automation
systems when upstream vertically
integrated?
Quality
management
Centralized decisions favour obtaining
high-quality products (e.g. fresh
foods)
R&D efforts are not dissipated and
favour both upstream and
downstream
A verticalized chain tends to offer a
high-quality product at a high price
Risk resilience moderates’quality
control in a vertically integrated chain
How to become quality free of the
noising of coordination of information
and ground rules?
What is the relationship between
vertical integration and quality
assurance?
Is there competition between supplier
and retailer when the retailer
demands high quality from its
supplier? Can the supplier become a
retailer too?
Sustainability Vertical integration improves the
livelihoods of people in developing
countries
What are the intrinsic factors in
industries that are favourable to the
vertical integration of the material
recycling activity (e.g. automobile)
(continued)Table 1.
Bridging the
gap

more likely to vertically integrate (Heriot & Kulkarni, 2001), while manufacturers of non-
specialized products are less likely to experience supplier opportunism (Kelly, Wagner, &
Ramsay, 2018).
While there are three conditions that can increase transaction costs (uncertainty,
frequency and asset specificity), it is important to consider the combination of these
with production costs. Vertical integration helps in simplifying communication,
having real-time data, faster allocation of resources and costs –by eliminating
unnecessary factors (KEK et al., 2022). Such emphasis is given to asset specificity
because it is the most consistently verified influence in empirical tests of the TCE.
Uncertainty has been difficult to conceptualize, measure and support. It is a construct
with subjective measure but is similar to risk tolerance and propensity to trust the
organization and its decision-makers. While TCE literature still does not examine the
evolutionary dynamics of the industry (how and why transaction costs are reduced), it
is necessary to consider in the models the evolutionary dynamics of the industry,
where service operation strategies are not only statically determined by transaction
costs but also by information asymmetries and differences in capabilities and
resources between companies.
Clearly, there are areas where further research is needed, and this review could serve
as the basis for future research questions. An industry that has undergone significant
Theme Aggregative result Suggested research questions
From product circularity, vertical
integration helps contain price
fluctuations
Partial vertical integration leads to
energy savings and carbon dioxide
emissions. As for the complete, it also
reduces lead times and produces less
waste
The efficient vertical structure does
not translate into compensation when
looking at the polluting effect of the
large production volume
and in industries that are undesirable
(e.g. home appliance)?
What is the vertical integration
process and recycling management
plan regarding optimization?
Emerging
issues
–behavioural
operations
–innovation
–new
product
development
Supply chains are not rational 100%
of the time
Capacity for innovative participation
is capital
Lack of resources and capabilities
forces companies to adopt frugal
innovation
Breaking dependency led companies
to develop innovations that gave them
a competitive advantage
Vertical integration favours the
development of new products
What are the behavioural biases of
managers for choosing to verticalize?
Based on higher costs when
outsourcing, what is the limit of tiers
that can be verticalized without losing
focus on the core business?
What is the cyclicality of the decision
between vertical integration and
outsourcing, without losing learning
about in-house operations?
Source: Authors
Table 1.
RAUSP

vertical disintegration, however, is banking. A future analysis of strategic opportunities
for the reintegration of credit business models is required, not least because institutional
variables seem to affect the vertical integration of the credit assessment phase (Scannella,
2015). After-sales service is another sector that is little explored in the operations
literature, although there is no correct way to configure this chain (Saccani et al., 2007). It
is needed to explore how vertical integration contributes to environmental performance
improvements and, especially, to explore the trade-offs with outsourcing, especially
regarding waste management.
Understanding an efficient vertical information flow in factories must be improved.
Supply chain planning is important for ensuring and expanding the global supply of
low-cost, highly efficient production. Several research opportunities are useful in the
implementation of sustainable approaches (e.g. green supply chain management and
circular economy) (e.g. green supply chain management and circular economy)
(Pohlmann, Scavarda, Alves, & Korzenowski, 2020).
It is necessary to develop general models that extend the dynamic analysis to include
sectors where buyers and suppliers can initiate profits by generating innovations. Related
theories do not help much when intermediate forms of ownership, such as joint ventures, are
involved in make-or-buy strategies (Balakrishnan, 1994). Also, the verification of the extent to
which firm-level transactions influence the boundary decisions of companies is awaited. For
example, tests for fixed or random effects and effects versus a cross-sectional model will be
conducted (Leiblein & Miller, 2003). It would also be productive to examine how differences in
the level of a firm’s absorption capacity (Leiblein et al., 2002)influence vertical integration
decisions (Cohen & Levinthal, 1990). We highlight the need for exploring how heterogeneity,
capabilities and governance are mutually determined (Brahm & Tarzij
an, 2014). If the degree
of competition is high, integration is negatively affected, with the optimal level of integration
negatively depending on the degree of competition. While these results are strongly supported
by the theory and evidence (as reported in Section 2), the topic of vertical integration strategy
is both complex and controversial. Even on the threat of new entrants in one or more tiers not
occupied by the incumbent firm, the latter have vertical integration as a mechanism to reverse
their inferior position under the threat of substitutes and achieve coopetition (Pi & Li, 2022).
Attempts at identifying managerial implications concern a particular industry or a set of
sectors, so replicating empirical studies in individual companies or in a group of companies
would be a fruitful exercise (Balakrishnan & Wernerfelt, 1986). It would also be beneficial to
initiate investigations that define in precise terms what a main supplier is (Perrons & Platts,
2005) and whether vertical integrations have focused on them to internalize operations.
Companies also are unlikely to integrate activities that differ greatly in formality from the
technical approaches on which they are based. For example, activities that benefitfrombasic
scientific knowledge differ from those that rely primarily on experience and intuition and
follow strategic commitments that may be mutually exclusive. Therefore, the stable set of
activities that the company performs is partially determined by its historical development and
not exclusively by its savings in transaction costs. Capabilities are also important when
knowledge related to the activities in question is partly tacit and team-based and therefore
takes significant time to acquire. New research can address supply-side integration in a
different approach to customer service that leads to cost savings (Crotti, Ferrari, & Tei, 2022;
Xue et al., 2013). Additional research should seek to discover the characteristics of knowledge
that generate differences and similarities between activities. This is necessary for delivering
predictive content for the enterprise resource approach (Argyres, 1996). Studies with customers
core element of the vertical integration strategy and TCE are necessary (Guan & Rehme, 2012).
Bridging the
gap

All in all, there are future opportunities for further investigations in emerging markets,
with an expectation of growing empirical investigation of the effects of supply decisions on
company performance in more industries and countries, as well as an exploration of the
representative data. Expanded empirical knowledge in combination with a greater
conceptual understanding can be immensely helpful for expanding the field. It is hoped that,
from a management perspective, executives will stop questioning whether the power of
making attractive profits is going to change, anticipate them and be able to assess when
they will make them so they thrive across product cycles rather than in just one (Christensen
et al., 2001). Despite the incipient nature of some themes, vertical integration in operations
management and supply chain studies, whose intensity has varied over the years, has
served as an incentive and starting point for future studies.
Finally, we summarize the integrated output model resulting from our empirical evidence
(see Figure 2). Essentially supported by the research questions that are the gaps and
bottlenecks of vertical integration, we split them into three major sections. Drivers are the
motivators for vertical integration research, whether favourable or undesirable. The
mechanism is the vertical integration strategy, and the bottlenecks are exclusively about
the process. Outputs are the topics linked to vertical integration effects and are split into
three: economic, organizational and sustainable.
7. Concluding remarks
Whenever there is a need to encourage the academic community to pursue more research
and explore new directions in OSCM literature, it is achieved through a literature review
that invites researchers to contribute to a given research framework. In this regard, we
presented an analysis of the state-of-the-art knowledge from sample papers, concisely
summarized these findings and demonstrated a suggested research agenda on vertical
integration.
We contribute to clearly unifying the vertical integration strategy as a platform to access
final demand and resource ownership to a single business unit. A state-of-the-art vertical
integration operations strategy is designed within the OSCM field. The results showed that
Figure 2.
Integrated output
model
RAUSP

there are no single factors such as future costs, structures or skills development. Rather, we
need to combine the view on production cost comparisons with the governance perspective,
considering the transaction costs caused by different modes of governance and the
competency perspective in relation to their impact on capacity building.
The findings of the study have several implications for both practitioners and researchers.
Vertical integration poses a dilemma: companies in industries that use specialized assets can
eliminate the inefficiencies of imperfect competition and save on transaction costs.
Downstream vertical integration is obviously a critical success factor in many cases, while
upstream integration is often a necessity. “There is no general theory for vertical integration”
(Chan & Reiner, 2019, p. 280). For transaction cost savings, the question of whether an
activity is viable for vertical integration or not depends on the specificity of the assets needed
to carry out that activity. On the other hand, from the resource-based (or competency-based)
view, the firm is considered a resource box and probably will develop and grow based on
existing competencies, expanding rather than acquiring the different competencies needed
for new activities. If the degree of competition is set to high, integration is expected, with the
optimal level of integration depending on the degree of competition.
This strategy is also compatible as a blue ocean strategy, since with vertical integration,
firms can make real product innovations to reduce competitors’former market power and
market share (Pi & Li, 2022). Firms are encouraged to integrate activities that differ greatly
in formality from the technical approaches on which they rely. For example, activities that
benefit from basic scientific knowledge differ from those that rely primarily on experience
and intuition and follow strategic commitments that may be mutually exclusive. Therefore,
the stable set of activities that the company undertakes is partly determined by its historical
development and not exclusively by its savings in transaction costs. This is important for
both managers evaluating vertical integration possibilities and policymakers interested in
supporting vertical integration decisions. Specifically, managers must evaluate a
reconfiguration of the firm supply chain and policy actors, which need to expect and plan an
economy more vertically, with a smoothness process in the regulatory agencies, as key
contingencies, and integration factors to generate excellent benefits.
Finally, if capabilities are also important when the knowledge related to the activities in
question is partly tacit and team-based and therefore takes a significant amount of time to
acquire from up-to-date external shocks, we want to highlight research on vertical
integration and performance. Therefore, a growing empirical investigation of the effects of
sourcing decisions on firm performance in more industries and countries, as well as an
exploration of representative data, is expected.
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