Vertical integration is a risky strategy—complex, expensive, and hard to reverse. Yet some companies jump into it without an adequate analysis of the risks. This article develops a framework to help managers decide when it is useful to vertically integrate and when it is not. It examines four common reasons to integrate and warns managers against a number of other, spurious reasons. The primary message: don't vertically integrate unless it is absolutely necessary to create or protect value.
Vertical integration can be a highly important strategy, but it is notoriously difficult to implement successfully and—when it turns out to be the wrong strategy—costly to fix. Management's track record on vertical integration decisions is not good. Vertical integration is a difficult strategy. It is usually costly and long lived, hence risky. It is not surprising, therefore, that some managers get it wrong—a problem for them, but an opportunity for insightful and bold strategists adept at exploiting others' mistakes.