Vertical (Dis‑)Integration and Firm Performance: A Management Paradigm Revisited

Abstract

Vertical disintegration in manufacturing industries has been an increasing trend since the 1990s in many countries. According to a prevailing management paradigm of focusing on core competencies, firms should have vertically disintegrated (i.e. outsourced non-core competencies) to achieve cost savings, enhance competitiveness and improve firm performance. In line with this management paradigm, most empirical studies therefore hypothesized a negative linear relationship between the degree of vertical integration and firm performance, expecting performance to rise when vertical integration decreases.In contrast to previous studies, finding mixed results, we assume an inverted u-shaped relationship, theoretically based on transaction cost economics and the resource-based view of the firm, and by considering advantages and disadvantages of vertical integration, with an optimal level of vertical integration, where firms with a too low degree of vertical integration could achieve higher performance by vertical integration, while firms with too broad vertical integration could achieve higher performance by vertical disintegration.With respect to our data based on a sample of 434 German manufacturing firms between 1993 and 2013 we find a decreasing trend of vertical integration over time. Applying multiple regression analysis, our findings suggest a positive, but diminishing relationship between the degree of vertical integration and financial performance. These two findings describe a paradox of vertical disintegration. The decreasing trend mainly emerges because lower performing firms outsourced their

Modelling supply chain viability during COVID-19 disruption: A case of an Indian automobile manufacturing supply chain

“…As we know, automobile manufacturers have shifted from vertical integration towards smaller and leaner operations (HUallacháin and Wasserman 1999;Kaiser and Obermaier 2020). Firms have downsized and started focusing on core things to increase their competency by leveraging their suppliers' capabilities.…”

The relationship between upstream vertical integration and environmental sustainability in the luxury fashion industry

“…The present research work targeted the 2009–2021 period, because vertical integration has regained momentum in the manufacturing industry especially after the 2008 global financial crisis (Kaiser and Obermaier 2020 ).…”

“…According to the value-added to sales approach (VAS), vertical integration can be calculated by diving value-added by sales. Other common approaches are the inventory to sales ratio and the income to sales ratio (Adelman 1955 ; Kaiser and Obermaier 2020 ). In comparing different measurement methods, Adelman ( 1955 ) observed that a simple way to determine the degree of backward vertical integration is to calculate, with respect to a given product, what percentage of inputs used by the firm is produced in-house.…”

“…The expansion of outsourcing and the new competitive context reduced the appeal of vertical integration during that historical period (Zhang 2013 ). However, vertically integrated models have gradually regained popularity among world’s leading brands, particularly in the wake of the 2008 global financial crisis (Kaiser and Obermaier 2020 ). For instance, LVMH expanded towards its suppliers through multiple operations, such as the 2011 acquisition of Heng Long, a Singapore-based tannery processing exotic leather (Heng Long 2019 ).…”

Determinants of Vertical Integration in Poultry Production in Ghana: Application of Count Data Models

“…Nonetheless, two distinct measures of vertical integration can be identified in the literature. These include measures determined from financial statements and the use of multidimensional constructs such as computation of indices based on available data (Kaiser and Obermaier, 2020).…”