ABSTRACT
The key question, whether with vertical integration or diversification, is how a corporation adds value by operating businesses as a combination of units relative to each business operating independently.
We have discussed both valid and not so valid reasons for vertical integration and diversification. While transactions cost economics provides a valuable tool to predict when a business should vertically integrate or diversify, both strategic actions have other benefits, particularly related to managing risk, gaining additional control, and creating synergies. In addition, firms have alternatives to bringing a function into the company; these include things such as alliances, long-term contracts, and franchising.
While we discussed what corporate offices do to increase the chances of a successful diversification or vertical integration, the question of relative skill in new businesses is paramount. Even as we become experts in our normal business, our experience may not apply to new businesses.
