Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)
CHAPTER 11. VERTICAL INTEGRATION AND THE
SCOPE OF THE FIRM
Introduction
Chapters 11-15 are concerned with corporate strategy. The number of sessions I devote to corporate
strategy depends upon the length of the course and whether or not there is a subsequent elective course in
corporate strategy.
I introduce corporate strategy by looking first at the boundaries of firms and their historical trends—
concentration on the expanding size and scope of companies for most of the 19th and 20th centuries,
followed by more recent downsizing, refocusing, and outsourcing. I then focus on vertical integration. I
Either way, my main goals for this session are for students:
• To appreciate the central issue of corporate strategy – the determination of the scope of the firm.
Class Outline
I introduce corporate strategy by considering the boundaries of the firm—covering the material in the first
section of Chapter 11, “Transaction Costs and the Scope of the Firm.” Following the work of Alfred
Chandler (The Visible Hand and Strategy and Structure), I note the expansion in the size and scope of
I then address the contracting of the boundaries of larger firms since the mid-1970s and the trends
towards outsourcing and re-focusing on core businesses, again asking my students “Why?” Explanations
This discussion of the relative merits of organizing within large corporations as compared with small
firms coordinated by markets provides an easy way into the basic principles of transaction cost analysis.
I then turn to the analysis of vertical integration; I begin with the American Apparel case—or another
firm where vertical integration has been a primary feature of the firm’s strategy (e.g. Zara, Bird’s Eye,
Comcast).
If, as in textiles and clothing, the industry is vertically de-integrated (i.e. separate firms manufacture the
So, why is that our case study firm (whether American Apparel or Zara or some other business) has been
successful despite rejecting industry conventions? The key is to recognize the unique features of its
strategy and understand that, despite foregoing the efficiency advantages associated with outsourcing, it
has gained particular competitive advantage through a unique strategy that exploits advantages of close
coordination between multiple vertical stages. Thus in the case of American Apparel and Zara it is
extremely short cycle times between initial product design and delivery to retail stores which allows very
fast response to emerging fashion preferences.
Cases
American Apparel: Vertically Integrated in Downtown L.A. (R. M. Grant, Contemporary Strategy
Analysis: Text and Cases, 9th edn., Wiley, 2016).
In 2015 American Apparel is in crisis: its founder has been fired as CEO and the company has sought
Chapter 11 bankruptcy protection. A key issue for the new CEO is whether to maintain American
Apparel’s vertical integration model or to follow the approach of almost all mass-market fashion clothing
Like American Apparel, Inditex (the parent company of Zara) has rejected the conventional wisdom of
the fashion clothing trade. At its base in the northwest of Spain it designs and manufacturers fashion
garments which it distributes direct to its own retail stores worldwide. While losing the cost benefits of
outsourcing production to manufacturers in developing countries, its tightly-integrated system allows
remarkable speed in responding to new fashion trends.
Eni SpA: The Corporate Strategy of an International Energy Major (R. M. Grant, Contemporary
Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).
The Eni case considers the corporate strategy of a vertically-integrated, multinational oil and gas major at
a time when the strategy that has successfully guided it for two decades is threatened by a combination of
problems—the most serious being a collapse in crude oil prices. Eni has undergone a transformation