Vertical Integration Strategy Based On The Enterprises Of The Industry Life Cycle Study

Integration is a strategy being the most widely used in companies, including M&A or reconstruct business around the SBU for more competition. Integration consists of vertical integration and horizontal integration .This paper focus on vertical integration.The theoretical base involved in vertical integration includes the theory of labor division and the modern firm theory. From the practice, researchers give a lot of reasons for vertical integration. In this paper, I think the life cycle of industry is the most important one from outside, and the capacity constraint is the most important reason from inside.According the capacity constraint, all company can be divided into two parts: rigid capacity constraint and flexible capacity constraint. The companies with rigid capacity constraint expand producing capacity difficultly. In the life cycle, with the changing of demand, profit will go up or down more than the afford level. So the companies should avoid the position and seek for vertical integration strategies. The sectors include the petrol-chemical sector, the iron making sector, and so on. The development history of these sectors is the history seeking for the vertical integration.The flexible capacity constraint industry will select different strategies in the life cycle of the industry development. In this paper, I will prove the conclusion with theory model: from the beginning of industry development, the companies all will be the vertical integration companies; with the developing of the industry, the company will disintegrate the product process; as the booming of the industry, the company will seek for vertical integration. When the industry comes into recession, the company will go in for disintegration, and with the recession go to the end, the company then pursue vertical integration.In a word, when the development of industry is more stable, the tendency to vertical integration is more obvious; inversely when the development of industry of industry is more unstable, the tendency to vertical disintegration is more marked. At the same time, when the expansion of industry is faster, the horizontal integration is more prevalent; when the recession of industry is faster, the horizontal disintegration is more popular.From the industrial history in 1870-1930 by the famous economist -A.D.Chandler, and from the history of the M&A in the modern times, we can prove the conclusion.The most important innovation of the paper:1) The paper gives an important analysis frame: capacity congstrains inside and industry life cycle outside, and divides the capacity constraints into the rigid capacity constraint and the flexible capacity constraint. The companies with rigid capacity constraint have a strong motivation of vertical integration to avoid the demand fluctuation. On the other hand, the flexible capacity constraint company will select different integration strategies when demand fluctuates.2) The paper gives an intact strategy frame. This is a complete new strategy view, being unseen in the early publication. The conclusion is very useful in the M&A and the development for company.3) The paper using game theory and the oligopoly theory, makes a model that the industry life cycle is exogenous, which promotes the vertical integration and foreclosure theory.4) The topic discussed in the paper can be extending in the demand/supply fluctuation in the procession of an industry, so the conclusion is in common use.5) Base on the modern firm theory, the paper gives a more micro general...