Article analysis*

1. review the article and note the findings 2. What is this articles relevance to strategic management? 3. What are the main learning points / take-aways? 4. What is your critique? 5. What are the limitations of the article? 6. What are the areas for future research? 7. What is your conclusion?

Vertical integration in supply chains: driving forces and consequences for a manufacturer's downstream integration \"791' Guam and fakob Rehme Department of Management and Engineering, Linkoping University, Unk'oping, Sweden Abstract Purpose Strategic concentration is a key issue for manufacturing companies when designing a supply chain. As a corporate strategy and a supply chain governance strategy, vertical integration relates to organisational economics and strategic supply chain management. Numerous explanations have been created for vertical integration, and transaction cost economics (TEE) provides a theoretical basis to help understand the process. However. the current popularity of vertical integration seems inspired by something more than altering industry structure and minimising cost. which are the traditionally accepted explanations for vertical integration This paper aims to explore the driving forces for vertical integration, particularly downstream integration of distribution, and the consequences of vertical integration in a manufacturerdistributor-reseller chain. Designfmethodologyfapproach This study adopted an exploratory case study approach to examine a Swedish~based timber manufacturer that vertically integrated a distribution centre in the UK. which made it a direct supplier to Dl'ir retailers and builders' merchants Data were collected primarily through openended. face-to-face interviews. Findings The study found that the most important factors driving the manufacturer's vertical integration of distribution were the demands of large retail chains and the manufacturer's decisions to focus on developing its positioning strategy in the supply chain. Vertical integration has transformed the manufacturer into a supplier to large timber products resellers, offering the firm a greater potential to provide integrated solutions and, therefore, become a strategic partner to its customers. Originalityrvalue This empirical study examined a building material distribution channel, a subject that has rarely been studied. Study results add empirical evidence to explanations and impacts of vertical integration, especially the integration of customer interface. Keywords Vertical integration, Supply chain integration, Downstream integration, Building materials. Retailing. Merchanting, Vertical marketing, Sweden Paper type Research paper |ntroducnn Strategic concentration in supply chains marks a key issue for manufacturing rms. Vertical integration means some companies. such as the Spanish clothier Zara. owning nearly the entire supply chain, from design and production, to Supply chain integration is a frequently examined topic in the supply chain management (SEND literature. In order to grow and sometimes to survive companies must make wise distribution and logistics. to stores worldwide. Zara's retail decisions regarding appropriate governance models for clothing peersI such as Benetton. The Gap. and Hennes e'icient supply chains. This involves considering everything 8: Niauritz. continue to rely on outside production partners from open spot markets; hybrid forms including through complete or strong outsourcing (Ferdows or at. collaboration. alliances. and joint ventures; to contracting 2004). and full vertical integration {c.g. Hobbs. 19%). vertical Many researchers herald the role of integration as the meet integration has attracted a great deal of research attention important 35133\" Of wellfunctioning supply Chili-'15 (eg. Richey at at, 2009]. Simultaneously. the current prevalence of outsourcing has forced many supply chains to become more specialised, making integration across company boundaries even more important. Some theorists even believe outsourcing parse can increase the e'lciency of supply chains (Kroes and Ghosh. 2010]. Although outsourcing is prevalent in certain industries and segments. it has been argued that different economic and technological circumstances require distinct supply chain governance strategies (Grossman and The current issue and full text archive of this journal is available at [[dpman1 2002; Rodney-Ind w CHE-s 2006]. In fact] the WWW-\"nerldlSiEht-WW1359354611\" outsourcing of the buying rm can be seen as the downstream from multiple disciplines. and strategic management and organisational economics researchers have made signicant contributions toward understanding this concept (hiahoney. 1992]. The SCM literature views vertical integration as one extreme of vertical coordination of supply chains (e.g. Hobbs and Young, 2000]. or as a precursor to supply chain integration (e.g. Stonebraker and Liao. 2006']. Received: 8 February 3011 Supply Chain Manogcrmm: An [um-nations] JuumaJ R I. d' 95 I\" r 7011 l'F.-2[3312Jl.'s'F301 3\"\" 'c ' \"1' ' 5.11.3de i: Eater-aid Gum}: Publiihulg Limited [[SSN 1359-35'1bl 10 August 3011 [not on ins-iasessneiieizem Accrued 6 November 3011 13} Vertical integration in supply mains: [triing forces Simply Chain Management in lntemational Journal W312i Grain and 30!:le Reliant vertical integration of the supplying rm, in which the vertical integration results from the customer's outsourcing strategy. However, this paper focuses of a manufacturer's deliberate strategy to integrate vertically downstream. Downstream integration plays an important role for manufacturing rms in several ways. First, it can help rms to secure the distribution channels of their products, especially in markets wilh increased uncertainties (Rangan et a1, 1993). Second, it can offer a way to control efciency gains and cost reductions in the supply chain {Frohlich and Westbrook, 2001). And third, downstream markets can offer important benets in addition to large new sources ofrevenue Wise and Baumgartner, 1999). In order to capture the value downstream, manufacturers need to expand their focus from operational excellence to customer allegiance and rethink the meaning of vertical integration (Wise and Baumgartner, 1999). This study sheds light on this type of strategy by exploring the driving forces for and consequences of manufacturing rms' downstream vertical integration strategy. In particular, this study seeks to explore the following questions: W'hat are the driving forces for manufacturers\" vertical integration of distribution? W'hat are the consequences of manufacturers' vertical integration of distribution? This paper will contribute to the SCM and vertical integration literature in three ways. First, it will focus on downstream integration of distribution, whereas [he existing SCM literature has focused largely on studying \"makeor buy\" decisions, which concern whether to integrate backwards (Lafontaine and Slade, 200T). Downstream integration has received little attention in supply chain research. Second, this paper intends to identify the driving forces for vertical integration with a particular emphasis on the SCM perspective. Although there are many explanations for vertical integration (e.g. Balakrishnan and Wernerfelt, 1986; Rain, 1968; McDonald, 1985; Williamson, 1985), most of these arguments were formulated between the 1960s and the late 1980s using transaction cost theory to explain vertical boundary choice (Mahnke, 2001). Thirty years later, it is worth asking whether [hese explanations are still relevant in today's business environment For instance, Osegowitsch and Madhok (2003) argue that recent cases of vertical integration indicate that explanations such as market power, monopoly prot, and transaction cost are increasingly seen as insufcient to explain current vertical integrations strategies, especially for those companies that move down to the customer interface Moreover, Grossman and Helpman (2002) argue that economic theories have focused on the bilateral relationship between a producer and a potential supplier in explaining vertical integration while neglecting the interdependence among various rms in an industry. Therefore, examining vertical integration from an SCM perspective reflects [he recent trends and should add insights to existing vertical integration research. Third, current SCM literature agrees that a company's position in the supply chain is an important strategic aspect (e.g. Harland, 1996', Lambert and Cooper, 2000), because it relates to appropriating value for the company by participating in a supply chain (Cox, 1997). This paper will 183 Hfwne 17 ' Number 2 ' 20.12 ' 187 20.1 contribute to this issue by analysing the impact of downstream vertical integration on supply chain positioning of manufacturing companies. The paper is organised as follows. The next section briey describes and compares the exisling literature regarding two distinct perspectives of business integration: 1 vertical integration; and 2 supply chain integration. Next, it develops a framework for understanding the driving forces for and consequences of vertical integration, while illustrating its research design and methods. Implications derived from the analysis will then be discussed, and an examination of the study's limitations and possible future research in this area will [hen conclude the paper. Theoretical background Different perspectives of business integration A great deal of research has been done on the importance of integrating suppliers, manufacturers, distributors, and customers {e.g. Clinton and Closs, 1997; Reck and Long, 1988; Rudberg and Olhager, 2003; Stevens, 1989; Troyer and Russell, 1995). Researchers have employed several different approaches to examine these issues, including SCM (e.g. Lambert et at, 1998], process engineering (e.g. Bircru et all, 1998) and suppliericustomer involvement in new product development (e.g. Petersen et at, 2005). In addition to the SCM literature, research in two other majorelds i.e. strategic management and organisational economics has conlributed signicantly to the understanding of business integration. The rtrategie management and ewntnnie perspmtive: vertieatr tntegratwn A classic denition of vertical integration based on its application to large corporations (Stonebraker and Liao, 2006) suggests that it involves \"a variety of decisions concerning whether corporations through their business units should provide certain goods or service inhouse or purchase them from outsiders instead\" (Harrigan, 1985, p. 39?). Vertical integration can be also described as the overall scope of different business activities in a supply chain brought under the management of a single company (Majumdar and Ramaswamy, 1994). It can be realised through two approaches: 1 vertical nancial ownership; and 2 vertical conlracts. Vertical nancial ownership eliminates company boundaries through mergers and acquisitions, while vertical contracting, which includes exclusive dealing, resale price maintenance, and exclusive territories, offers a viable alternative to vertical nancial ownership (NIahoney, 1992). According to Klein {1988), by shifting the ownership of an organisational asset, vertical integration can imply an increased ability to direct cooperating inputs compared to a longterm contractual arrangement. However, most theories of vertical nancial ownership are more accurately described as theories of vertical integration strategy (Mahoney, 1992). Driving fewer for vertieai integratiirn Research in a variety of elds, including economics, marketing, law and strategic management have produced theoretical rationales for vertical integration. Mahoney (1992) Vertical integration in supply mains: driving forces Simply Chain Management An lntematiunal Journal Waltr' Gum! and 30!:le Reliant concludes that the driving forces for vertical integration in strategic and economic theories can be classied into four categories: 1 transaction cost considerations; 2 strategic considerations; 3 output andJ'or input price advantages; and 4 uncertainties in cost and-\"or prices. Nlajumdar and Ramaswamy (1994) organise the rationales for vertical integration into two major theoretical frameworks: traditional and transactional. The traditional framework views vertical integration as a response to technological and operational interdependencies between two successive stages of the activity chain (Bain, 1968; Chandler, 1977). The transactional framework states that an integrated rm will do better Ihan its nonintegrated competitors ifhigh prots can be found in [he supply chain (Klein (It at, 1978; Williamson, 1979). A response to relatively high costs of market exchange is the most cited reason for vertical integration (McDonald, 1985). Adelman (1955) writes that every rm must choose between make or buy, sell or process further. The decisions depend upon the particular economies of each course of action (Adelman, 1955). In imperfect markets, transactions become cosdy when exchanges involve transactionspecic investment (Levy, 1985). Transaction costs may arise because of the expenditure of time and resources in identifying suitable trading partners, specifying product quality, galhering price information (Hobbs and Young, 2000), negotiation of contracts, and monitoring of performance (Majumdar and Ramaswamy, 1994). Therefore, the basic rationale for bringing various business activities under one umbrella is to lower marginal costs of intrarm compared to the cost of managing conlracts (Williamson, 1971, 1975). In other words, through vertical integration, a rm can use administrative direction to replace the bargaining of the market (Adelman, 1955), and the incentive of a bargain is restrained bureaucratically (Balakrishnan and Wernerfelt, 19815). In addition, by integrating forward, a monopolist can convert efciency loss in two successive stages into prot, thereby expanding its input use to an optimal level (Vernon and Graham, 1971; Warren-Boulton, 1974). From a strategic perspective, vertical integration can implement entry barriers for competitors and lead to excess prots. By integrating into additional stages of products, manufacturers raise the capital requirements for entrants (Balakrishnan and Wernerfelt, 1986). Similarly, Waterson (1993) argues that vertical integration can increase rivals' costs or leave the market thin, thereby restricting the expansion of competitors Also, vertical integration is also viewed as a slrategic response to monopoly market power (McDonald, 1985). If there are variable proportions between input and output, then integrating between two successive monopolies maximises joint prots (Majumdar and Ramaswamy, 1994). Williamson (1985) argues that uncertainty plays a key role in forward vertical integration. In a distribution channel, uncertainties can exist with respect to many marketing activities, including sales targets and promotional activities. The transaction cost analysis (TCA) approach points out that a proper reaction to uncertainties is to internalise the transaction {john and Weitz, 1988). There are two reasons for this. First, vertical integration allows sequential decision making to proceed more smoothly, and second, the authority 189 Iiwne 17 ' Nmttber 2 ' ZEHZ ' .187 20.1 structure formed by vertical integration permits faster resolution of conflicts Uohn and Weitz, 1988). BarreraRey (1995) adds that forward integration by manufacturers may also be driven by the separation of downstream markets for the purpose of price discrimination, which could happen in the case of a monopoly selling to two industries The literature has identied two interrelated forms of vertical integration: forward and backward integration (e.g. Barreyre, 1988; Rangan at all, 1993). However, recent cases of vertical integration, especially forward integration into customer interfaces, might be driven by factors not addressed in traditional explanations (Osegowitsch and Madhok, 2003). The present paper summarises most of the driving forces for vertical integration mentioned in the literature except for transactions cost and bilateral monopoly considerations and presents them in Table I. Gmtreqmtnws of wrtical integration on snppfirttr and their mswmer interface) The consequences of vertical integration have been examined based on market power (e.g. Hastings and Gilbert, 2005', Normann, 2009) and market outcomes, such as the price of a nal product and product quality (e.g. Arya at all, 2008', Matsubayashi, 2007). This study focuses on the consequences of vertical integration on a company's position in a supply chain, which is important because it determines the company's required resources, capabilities and competitive advantages (Nicovich and Dibrell, 2007). From a company perspective, supply chains can be divided into upstream and downstream (Galbraith and Kazanjian, 1986;Nicovich and Dibrell, 2007). According to Nicovich and Dibrell (200?), organisations whose activities are centred in either upstream or downstream chains differ gready in terms of the factors for success. Upstream competitors are closer to the material end of an industry's supply chain, and thus value is added by transferring raw materials into standardised commodities. Competitive advantages likely involve process and costoriented mechanisms that facilitate the achievementof a lowcost position (Nicovich and Dibrell, 2007). In contrast, downstream actors are closer to the nal consumption of products and services, and value is added through advertising, product positioning, and marketing channels. Therefore, downstream organisations are characterised as having the ability to produce products that meet diversied needs (Nicovich and Dibrell, 2007). Downstream integration gives manufacturers control over how products are marketed. However, manufacturers might take the risk of bearing distribution and selling expenses (McGuire and Staelin, 2008). Cox (1999) argues that it is best to be in a position of power over all others in the supply chain relationship. The sttpply chain management parrpectimt: rteppy chain integration SCM has been described as the integration of all valueadding business processes om raw material extraction to the consumption of products by end users (Cooper at a1, 1997; Wisner and Tan, 2000). Supply chain integration is related to coordination mechanism and especially implies that business should be streamlined both within and outside the company (Cagliano (It at, 2006). The challenges with supply chain integration involve internally integrating crossfunctional business processes within a company and externally integrating material and Vertical integration in supply chains: driving forces Empty Chain Management: in lntemational Journal W352i Court and Emmi: Reliance Table l Driving forces for vertical integration of distribution Driving force Expla nation Mfume 17'Nmriber2 ' ZEHZ ' 18.7 20! Source Technical complexity Differentiation Higher margin Strategic pa rtners hip with custome rs Customer demand of integrated solutions Syne rg ies Learning High penetration rates and longer product life spans make the number of products in Lse relatively larger than the number of products sold in any year. Therefore, a significant portion of value-added activities has shifted away from manufacturing towards maintaining and servicing existing products The use of distribution services for product differentiation is especially necessary for products that are not easy to differentiate by their own attributes either because of a lack of physical differences or because consumers do not perceive any significant differences Downstream markets offer important benefits such as large new sources of revenue and require fewer assets than product manufacturing Service offerings in the customer interface provide supplier with a powerful means of retaining and expanding business with their most valuable customers This creates potential opportunities for companies to become more strategic business partners with customers, thereby improving customer retention Customers concentrate more on their own core competencies and increasingly rely on their suppliers to provide solutions that can be integrated into businesses processes Powerful synergies can be obtained by supplier penetration into customers' decision-making processes. For example. by getting involved in customers' inventory management. suppliers have access to more timely and accurate information of demand. Lead-time may be used to change manufacturing plar's Dowr'stream integration facilitates suppliers' access to both information and knowledge about customers. This knowledge extends beyond ir'sight into what customers want to an in-depth understanding of why particular offerings are seen as desirable by the customer. how best to provide them. and what future offerings might look like Osegowitsch and Madhok [2003) Etgar (191'3), Osegowitsch and Madth [2003) Wise and Bau mgartner [1 999] Anderson and Narus [1995) Osegowitsch and Madhok [2003) Osegowitsch and Madhok [2003) Osegowitsch and Madhok [2003) information flows across actors in the supply chain {Lambert 5 at, 2005', Richey or at, 2010). External integration involves coordinating and integrating the forward physical flow of deliveries to customers and the backward flow of materials and information from manufacturers to suppliers (Martin, 1992; Saunders, 1997; Trent and Monczka, 1998). Romano's (2003) review identies four types of integration in supply chains: 1 functional; 2 logistical; 3 informational; and 4 process. Stonebraker and Liao (2006) argue that, in management theory, vertical integration is a precursor to supply chain integration; therefore, it is no surprise that these two concepts share a number of characteristics. However, two distinctions should be recognised. First, transaction cost economics (TEE) provides the theoretical basis for vertical integration {Hobbs and Young, 2000), while the theory of industrial dynamics supplies the foundation for supply chain integration (Chen and Paulraj, 2004). Second, the primary integrating mechanism in supply chain integration is considered to be cooperation and coordination rather than ownership (Lee and Ng, 1997; Stock at all, 1998). Driving form: for supply chain integration The driving forces for creating supply chains where the members are strategically, operationally, and technologically 190 integrated stem from two sources: external pressure and potential benets from supply chain alignment {Fawcett or at, 2008). Chen and Paulraj (2004) conclude that environmental uncertainty, customer focus, and information technology form the three key external forces driving the development of SCM. Simatupang and Sridharan {2004) stress that intensied competition in slower growth markets can stimulate supply chain integration. Mehta {2004) bdieves that advances in technology and increased customer demand have been driving integration both within and across company boundaries. ICook and Garver {2002) write that integration can be sparked by the desire to satisfy diverse customer needs while maintaining lower costs. Potential benets from successful supply chain collaboration provide the second main source of driving forces. The goal of supply chain integration is typically to achieve lower costs and-\"or better services {Troyer and Russell, 1995). Simatupang :3: at. (2002) add that supply chain integration is the key to obtaining the necessary exibility so that rms can progressively improve the logistics process in response to rapidly changing market conditions. A properly managed relational integration can lead to collaborative planning, reduced inventories, lower distribution and transportation costs, and improved cycle times and customer services levels (Richey w mt, 2010). Some factors common to both vertical integration and supply chain integration include customer demand, advanced technology, and intensied competition, although they are Vertical integration in supply chains: driving forces Simply Chain Management An lntemaenal Journal Wei Curl\" and federal: Refine: formulated differently. For example, technical complexity in Table I means high-tech products have longer life spans and require intensive maintenance and support services, thereby creating new sources of revenue. Increased technical complexity is a reection of progression of technologies in manufacturing, information sharing, and communication What's more, differentiation and higher margins are viewed as forces driving companies to vertically integrate forward. The lack of product differentiation and low margin are results of intensied competition in the market place, which is identied as one of the driving forces of supply chain integration. By contrasting and synthesising the driving forces of vertical integration and supply chain integration, the factors listed in Table I can be split into two groups: 1 external factors; and 2 potential benets. Within each group, factors with strategic importance can be separated from those factors that have economic importance. Figure 1 displays the framework for understanding driving forces for and consequences of downstream vertical integration. This paper will focus on the consequences of vertical integration with respect to business focus, required resources, and competitive advantage, which are relevant to the company's position in the supply chain, and will examine whether the potential benets driving vertical integration can be achieved. Methods Background and sampling This study adopted an exploratory approach that allowed for exibility and adaptability (Yin, 2008). Casebased qualitative and exploratory approaches were chosen as the most appropriate in this context to uncover and promote a better understanding of this complex eld (Frey and Fontana, 1991; McCutcheon and Meredith, 1993). \"Binnie L7 ' Nurrlber 2 ' ZEHZ ' 18.7 20} Strategic case selection can increase the generalisability of case studies, according to Flyvbjerg (2 [306), who summarises two general types of selection, including random selection and informationoriented selection. For this study, information oriented selection was chosen in order to maximise the utility of information from a small sample. The selection was based mainly on the following criteria: 1 the company should be a leading player in its industry; and 2 the company must have vertically integrated forward in its supply chain receny. The search for a suitable case study subject was begun in the Swedish sawmilling sector because vertical integration is prevalent there. This sector is a dominant force in the forestry industry, accounting for 4 per cent of Sweden's GDP and approximately 13 per cent of its export goods (Swedish Forest Industries Federation, 2009). S Timber, one of the top Swedish timber product manufacturers, was chosen to be the main subject of the case study; the company, which is a leading and large player in the industry, recently acquired a distribution centre in the UK. In order to involve more actors in the supply chain, resellers were chosen from the supplier's customer base, and each studied company formed a case unit. Data sources and informants Frey and Fontana (1991) note that case studies normally focus on two types of data gathering: 1 observation; and 2 interviews. Primary data in this study were collected through indepth interviews with the help of loosely structured interview guides. Three distinct interview protocols were designed for the manufacturer, distributor, and reseller, which included both doityourself {DIYJ retailers and builders\" merchants (BMs). Protocols were developed that included topics and Figure 1 Proposed framework for understanding the driving forces and consequences of vertical integration External factors St rategit - Technical complexity a Customer demands Vedical integration of distribution Pote ntial benefits Snare-sic Economic n Differentiation 0 Higher ma rgi n 1- Learning 9 Synergies Strategic 0 Better service! partnership lower cost wilh customers Consequences 191 Position Strategic Economic 0 Business focus I- Diiierentiation 0 Higher margin 0 Required 0 Learning 0 Synergies resources 0 Strategic partnership 0 Better service;I - Com petrllve with customers lower cost advantage Vertical integration in supply drains: driving forces Simply Chain Management in lntemational Journal Wei Court and formal: Referee questions to be covered in the interviews, while also allowing for openended conversations in order to encourage participants to talk freely. Information questions and opinion questions were used to collect facts and perceptions; probing questions were also prepared to be used when informants\" answers caused conision or required more details. The questions were sorted into topic areas. For the manufacturer, the key questions focused on the supply chain strategy for distribution and sales of products, as well as the company's positioning in its supply chain. The central questions for the manufacturer's subsidiary the distributor in the UK related to its operations ofwarehousing, delivery and customer management. Resellers' views were sought regarding the focus of their operation, particularly in terms of supply strategy for the timber section and supplier value. A total of 19 interviews, lasting from 30 minutes to two hours, were conducted between 2009 and 2010 with eight companies that represented three stages in the supply chain. According to Yin (2008), when utilising semistructured interviews, it is important to identify key informants and focus on those who are in a position to have information about the problems studied. Table II shows details about the informants in the interviews. Data analysis All interviews were documented and transcribed, and the information was collated into case units along with any supporting secondary data, such as company magazines, web resources, annual reports, sales reports and meeting presentations. The interview transcripts and documents were examined thoroughly for themes and patterns (Miles and Huberman, 1994), and then each case unit was studied in detail. Open and axial coding techniques were used to break down the data for analysis, and a number of logical sections emerged, each with a sub-theme. Theoretical themes were continuously matched and contracted with the evidence from each case unit in order to assess how wdl or poorly they t with the case data {Eisenhardt, 1989). Conceptualisation, categorisation and building connections across categories were conducted during the analysis. Table II Companies studied and respondents interviewed Mfume 17 ' Number 2 ' ZEHZ ' 187 20! Case studies S Timber Sweden S Timber is a part of the F Group, which manages extensive forest holdings and supplies raw wood materials, as well as transport solutions to its business units. The rm is one of the largest sawmill companies in Europe, including sawmills, woodprocessing units, distribution and wholesale operations. During 2003 and the rst half of2004, S Timber conducted an extensive review of its strategy, and eventually implemented a new strategy in response to the changing environment: Gradually and systematically, S Tunber shall develop relatiimships wid1 selected customers toward a supplier role, implying that S Timber's mm products can be supplemented with products produced through outsourcing or: purchased, ifneeided. S Timber Supply UK (STS) In order to increase its market shares in the UK, in which DIY retailers are strong, S Timber began to investigate the possibility of supplying the DIY sector, and learned that a distribution platform was needed in order to satisfy the complex demands of DIY retailers. Consequently, S Timber acquired a distribution company {STSSTD in Figure 2), forming STS in 2003. Through the acquisition, S Timber vertically integrated downstream in the supply chain and obtained a position to supply to DIY retailers. S Timber had previously cooperated with a British regional planner and distributor, referred to here as BS Timber {STS W'EIL in Figure 2), which represented an important link in the supply chain to the British market, primarily in the builders' merchant (BN1) segment. The objective of working closely Figure 2 The supply diain of S Timber F G route S TII'I'Ib-c: [Swedenll {Sweden} 515 tun] orr retaitm 31 Elli-ls STS-WEI. Position in supply chain Company Company type lnformants Manufacturer 5 Ti mber Ti mber manufacturer Marketing director Distributor STS Timber products distributor Managing director Operation director Marketing director Two account managers Warehousing and transportation director Production manager Purchase manager Reseller A DIY retailer DIY manager and store manager Reseller 3 DIY retailer Timber trading director and store manager Reseller C Dl'ir retailer Timber buyer and store manager Reseller D Builders' merchant Timber buyi ng manager and store manager Reseller E Builders' merchant Timber buyer [G Group) and store manager Reseller F Builders' merchant Two store managers 192 Vertical integration in supply mains: driving forces Simply Chain Management in lntematiunal Journal Wald Guava and federal: Reliant: with BS Timber was to get a strong supply chain concept on the market with the capacity to complement S Timber's product portfolio. In order to strengthen its position as a supplier to the BM sector, STS acquired BS Timber in 2007. Figure 2 illustrates [he current supply chain for S Timber. S Timber's position as a direct supplier to the building material resellers gives it better access to the market and stimulates the entire company to be moremarket oriented. For example, S Timber periodically reviews the effects of changes in its business environment, such as regulations, raw material supply volume, and customer tastes. Inter departmental meetings are held to discuss market trends and developments. The marking director commented that S timber has a solid background in production but that its knowledge of DIY retailers and BMs was weak. As a result, the company nds it difcult to constantly satisfy Ihese chains. Customer base of STS STS's top ve customers contribute 80 per cent of its business, with the remaining 20 per cent coming from smaller, independent merchants. STS has placed a low priority on increasing its customer base and instead focused on growing with existing customers into other product categories. By expanding the business into new categories, the volume of goods for each delivery has increased, which has improved Ihe e'lciency of the supply chain. The DIY mailer: Company A, B, and C are the major chains in STS's DIY account. Company A is the UK's secondlargest home improvement retailer and STS's largest DIY customer. It has more than 300 stores throughout the UK and the Republic of Ireland, aims to provide topgrade products with reasonable prices, and has attached a great deal of importance to delivery reliability. Although the chain has its own distribution centres, the products supplied by STS are delivered direcy to company A's stores. Each store usually receives one delivery per week, but some stores can receive more frequent deliveries if their demand is high. The top SCI stores, for example, receive two deliveries each week. According to the DIY manager of company A, the company has abandoned the traditional way of working that involves a large number of suppliers competing wilh each other based on prices, and shifted to a process of forming partnership with large suppliers. This shift allows company A to keep a smaller number of suppliers for each product category and designate the largest and most proactive supplier to be the captain of that category. Company B is the thirdlargest DIY retailer in the UK. It serves the light DIY market sector and most of its stores have some form of garden centre. STS supplies the company with about 30 kinds of products, ranging from interior decorations to outdoor living. Company B considers price to be one of the most important factors when selecting suppliers. However, the timber trading director commented that it would not trade product quality for price. Unlike company A, company B uses its own distribution centres to supply its stores and keeps two to three suppliers for each category. In general, three major suppliers are used to supply the timber section. The timber trading director claims that company B o'ers relationships with some of their suppliers in category management. 193 Ilume l7 ' Number 2 ' ZEHZ ' 18.7 201 Company C, which has more than 190 stores, focuses on the hard-side DIY products and mainly serving serious DIY buyers and those in building trades. In order to successilly handle the challenges from the competitive marketplace, the company had recently radically reengineered its whole supply chain, creating three distribution centres and extensively consolidating its supply base. On average, only four suppliers are retained for each category. STS supplies decking products to company C. These three customers all require products that are privately labelled and wrapped, as products supplied to DIY chains generally must be readytogo and readytouse for private consumers. This means that the size of products should t in a car and be easy to assemble with a minimum number of pieces, accompanied by easytoread instructions. In addition, these DIY retailers put the supplier in charge of instore merchandising, making the supplier's responsible for ensuring that products are nicely presented on shelves and that paper materials for promoting sales are in place and replenished in a timely manner. The builders\" wavefront: One of the top accounts for STS is company D, one of the UK's leading builders' merchants with more than I500 branches nationwide. Timber is a particularly important product category for company D, with timber products contributing an average of 20 per cent of a branch's turnover, according to the store manager. And because it is such a big group with a highdemand level, company D places a high value on the security of its timber supply, according to the buying manager in charge of the timber sector. Instead of buying machined products from external suppliers, company D runs three sawmills, believing this operation is the most protable option. The company receives timber materials from suppliers worldwide, but mainly from Nordic countries and Russia. Because centralised operation practices dominate company D's purchasing and distribution, STS delivers materials to the company's distribution centres. Company E and F are also among STS's top three BM. accounts. They belong to the C Group, which places ve key demands on its suppliers: 1 supply FSCcertied timber products; 2 supply a complete range of DIY and merchant mouldings; 3 provide justintime delivery; 4 provide marketing support and innovative ideas; and 5 provide staff training. Company F is a fastgrowing company with more than 150 branches that trade only with professionals. It targets renovation, maintenance and improvements {RMlj project contractors. STS has been one of the biggest suppliers of solid wood products to company E for several years, and approximately 90 per cent of all nished wood sold in company E's stores comes from STS. All deliveries from STS are made to stores of company E. and F. Analysis and d iscussinn Driving forces of vertical integration in supply chain External factors Rdirlicnl cmplcxiqy. The sawmilling industry has beneted from advancing technologies. \"Thanks to the massive and sophisticated machines, the efciency and quality of felling, grading, and sawing work has been improved greatly in forest Vertical integration in supply drains: driving forces Simply Chain Management in lntemational Journal Wei Guava and Ethical: Raff\"!!! and sawmills\Vertical integration in supply mains: driving forces Simply Chain Management in lntematiunal leumal W352i Gum! and federal: Reliant Flattrttt'ai berm its DtLwntt'aticm. One concern expressed by the marketing director for S Timber is that solid wood products can be classied as a kind of standardised commodity that it is hard to differentiate due to lack of physical differences. Therefore, adding distribution solutions to S Timber's total offering was expected to make a distinction between S Timber and its competitors. This nding supports the argument that using distribution services in the customer interface could lead to an offering differentiation (Etgar, 1978; Osegowitsch and Madhok, 2003). Mantingt'rtrategic partnership with Hummers. S Timber also expected that its vertical integration moves would allow it get closer to its customers and obtain a better understanding about their businesses. Like many other manufacturers, S Timber formerly placed great emphasis on meeting production quotas, ensuring quality levels, and pricing its products suitably for distribution (Blois, 2001). But, according to S Timber's marketing director, that productionorientated strategy had been seriously challenged by decreasing protability and lack of knowledge about end markets. Downstream integration was expected to facilitate the manufacturer's access to both information and knowledge about its customers (Osegowitsch and Madhok, 2003). In this case study, one of the most signicant potential benets of acquiring the British distributor was to give S Timber more accurate and more timely information about demand level, inventory level, and customers\" requirements for products and services. S Timber expected the better knowledge about its customers could lead to more in depth collaboration with them. The marketing director for S Timber expected that developing partnerships with its customers could lead to better product innovation \"Integrating DIY chains into our new product development process from idea generation to product launch is what we are aiming for\Vertical integration in supply mains: driving forces Simply Chain Management in lntematiunal Jeumal W352i Gum! and federal: Reliant marketing strategies. As a result, S Timber's product lines depend more on its customers' needs than its own internal politics. Simply chain whimsy. The vertical integration strategy has improved the company's supply chain eiciency in several ways. First, according to the warehousing and transportation manager for STS, after the acquisition of the British distribution centre, S Timber extensively rearranged its warehouse to optimise the route of truck loadingfunloading and order pickup, and also began to employ a morecost efcient logistics provider. Second, having its own distribution centre stimulated S Timber to maximise its production capacity in production sites both in Sweden and in the UK. Third, a wide product assortment has increased the volume of goods for each delivery, which has reduced the numbers of order pickups in the warehouse. This, in turn, reduces the number of trucks sent out from the distribution centre and increases the value of each delivery. .S'aJtapfy chair: viribtiity. After the two acquisitions, S Timber has invested the time and effort needed to map their supply chains. \"We now have a better idea of how our core supply chain works and who are the key participants\Vertical integration in supply chains: driving forces Simply Chain Management An lntemational Journal Wait Curt\" and nial: Reform Ilume 1'7 ' Number 2 ' ZEHZ ' 18.7 201 Figure 3 Modified framework for understanding driving forts and tonseg uentes of vertical integration External factors Strategic a Technical to molexity 0 Customer demands 0 Positioning in supply chain vertical integration of distribution Pote ntial be nefits Strategic Economic o Differentiation a Higher margin 1- Learning 0 Synergies . Strategic a Better service! partnership lower cost with customers organising product assortments, product customisation, assuring stock availability, logistics and providing aftersales services ("Riis rt mi, 2007], which increases its inuence when appropriating value from other supply actors. Undertaking more functions in a supply chain requires intensive collaboration with other suppliers and exposes a company to more rms in the business network, such as product suppliers, logistics suppliers, and marketing service providers. Interaction between companies is a key aspect for accessing and utilising other actors' recourses and competencies (Cox and Lamming, 1997; Svahn and Westerlund, 2007). Consequently, key managerial capabilities, such as influencing, controlling, coordinating and integrating (Svahn and Westerlund, 2007), need to be strengthened In an increasingly tough and competitive business climate, manufacturers are focusing more intently on highly processed products with higher knowledge content. This change means that soft values such as smart logistics, technical support, and aftersales service have been assigned greater importance. This trend is a response to customer needs of integrated solutions {Osegowitsch and Madhok, 2003), and it is also a major consequence of manufacturers' vertical integration strategy. Working direcy with resellers provides opportunities to study customers and discover their needs and requirements in many regards, including goods, services and knowledge. The knowledge obtained from interacting with customers represents a powerful means of improving the total offering, which in turn, improves customer retention. Theoretical and practical implications These ndings from this study have some important implications for SCNI theory and managerial practice. In theory, SCM allows companies to focus on doing exceptionally well a few things for which it has unique skills and advantages. Noncore activities are outsourced to channel 19} Position Strategic Economic 0 Business focus 0 Differentiation a Higher margin I Required 0 Learning 0 Synergies resources I Strategic pa rtnership - Better service] o Competitive with customers lower cost advantage Supply chain visibility members that possess superior capabilities in those areas (Cox, 1999; Lutz and Ritter, 2009; Quinn, 2000). Vertical integration through ownership appears to implement a different mindset of restructuring and reengineering the supply chain in order to increase company competitiveness and satisfy key customers. The classic works of understanding vertical integration, including those by Adelinan (1955) and Rain (1968], followed by Williamson (1971, 1975, 1979] and Levy (1985), are primarily concentrated on the theory framework based on transaction cost economics (TCE). However, with the fast pace of change in the business environment, considerations such as the inefficient market mediated exchange and uncertainties are not sufcient to explain modern cases of vertical integration. In addition, traditional explanations based on the TCE framework have not given much attention to the role of customers. The notion of customer focus in terms of understanding customer needs, satisfying customer needs, providing titnely service, creating customer value has received attention in several research communities, such as SCM (e.g. Chen and Paulraj, 2004), market orientation (e.g. Kohli and Jaworski, 1990), and new product development (e.g. Cooper and Kleinschmidt, 1995; Fang ci: all, 2008). In this study, the results demonstrate a need to put customers as the central tment of vertical integration strategy. Future research into vertical integration, especially forward integration into customer interface, could benet from other theory frameworks, such as SCM, which have addressed customer focus. This study raises the question of how manufacturing companies are viewed and positioned in supply chains. Not only is the number of performed functions increasing, but through these inctions, manufacturers are developing a greater appreciation for supply chain integration that synthesises their plans and strategies, and ultimately leads to upstream and downstream changes. Moreover, it may no longer be enough to consider moves to enhance management Vertical integration in supply drains: driving forces Simply Chain Management An lntematiunal Jnumal Wr' Gm!\" and 30!:le Halon: of supply chains Ihat are concerned only with improving manufacturers' efciency in order to obtain competitive advantage. Considerations regarding strategic positioning in a supply chain and market with the aim of obtaining better conditions in appropriating value from other supply chain actors may have greater relevance and signicance in vertical integration decisions. This study also raises the interesting prospect that iture SCM research should not consider vertical integration as an organisation's last resort Williamson, 1991), but could view it as an appealing strategy for supply chain design and restructure. Downstream vertical integration is relevant to strategic positioning, efficiency, capacity and some other issues that are critical to most rms. One of the challenges associated with supply chain length is the lack of visibility within the pipeline. Hence, it is often the case that one actor of a supply has no detailed knowledge about [he situation (e.g. pipeline inventory, order status, demands forecast, etc.) in other parts of the supply chain {Christopher and Lee, 2004). It is believed that sharing information among supply chain members is the key to improve supply chain visibility {Barratt and Oke, 2007; Christopher and Lee, 2004); however, access to information is often hindered by lack of trust between companies {Barratt, 2004). Vertical integration could improve supply chain visibility by eliminating the boundaries between two supply chain members, thereby giving companies access to detail information about the successive parts of the pipeline. Although this paper argues that vertical integration has its advantages, supply chain collaboration, both external and internal, remains a relevant issue for vertically integrated companies. On a more fundamental level, we would suggest that more attention should be paid to internal collaboration; because each organisation in a supply chain has its own plan for its activities, ownership cannot improves efciencyr of these activities and solve all emerged conicts. In order to maximise the success of vertical integration, companies need to understand a number of issues, such as which activities call for collaboration and what are the elements of collaboration? This study also reveals several important implications for managers. First, integrating downstream business could imply high investment, and, therefore, high risks. Any initiative in this area is likely to be resource intensive in its early stages. However, owning the most critical resources in a supply chain helps the company appropriate value from other supply chain actors, and ultimately, strengthens the company's power position in the supply chain (Cox, 1997). Downstream vertical integration in [he supply chain involves a strategic intent with regard to controlling the resources required to deliver differentiated offerings to customers, which would improve the company's goal of claiming value for itself. In the case study, the manufacturer's strategy ofpositioning itself in the supply chain can be seen as a move to control critical supply chain resources. For a process industry like samilling, volume production is the traditional emphasis and a key factor for success. Downstream vertical integration creates a new set of resources and capabilities that the manufacturer must master. Therefore, it is important to understand the resources and competencies required to perform the downslream functions, since manufacturing and distribution requires different sets of skills. Second, although vertical integration internalises the manufacturers\" interactions with distributors, it also 193 Iflume l7 ' Number 2 ' BENZ ' 18.7 2E\" increases the need for interaction wilh other downstream actors, and led to increased demands pertaining to understand the needs and requirements of merchants and retailers. Not least, vertical integration also necessitates a deeper understanding of lnctions such as purchasing, logistics and marketing. Therefore, vertical integration in the supply chain also implies an increased emphasis on key managerial capabilities, such as inuencing, controlling, coordinating and integrating. Limitations and future research The use of case study to examine driving forces for and consequences of vertical integration has some very obvious limitations, particularly that of generalisability. However, this study relies on analytical generalisation (Yin, 2003) and was exploratory in seeking to identify relevant factors. Thus, it is suggested that the arguments developed here be tested statistically by means of a survey that utilises a larger sample and in contexts other than timber products distribution channels to improve their external validity. Although much of the supply chain and operation literature assumes that a greater degree of supply chain integration is strongly associated with higher levels of operational and business performance {e.g. Cagliano er al., 2004', Frohlich and Westbrook, 2001; Rosenzweig er al., 2003], empirical evidence is needed to evaluate the relationship between vertical integration and level of performance. 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