Vertical integration moment in dynamic markets
Strategic Outsourcing: An International Journal
ISSN: 1753-8297
Article publication date: 22 June 2012
Abstract
Purpose
This paper intends to quantify the impact of anticipating a capacity expansion, treated as a risky investment in a strategic vertical integration.
Design/methodology/approach
This paper adapts the real option methodology to a time frame model. It uses a case study to investigate the vertical integration approach.
Findings
The integration value depends on the demand critical level under market volatility. The existence of demand positive jumps affects the demand critical value and the integration decision moment.
Research limitations/implications
The numerical example is limited to a single organization, but the findings allow a generalization of the proposed framework.
Practical implications
The model helps managers to more accurately decide to change from outsourcing to an integration strategy and defer commitment until future uncertainties, related with market and lack of information, can be partially solved. Finally, the paper provides a time framework for a strategic decision support system.
Originality/value
The research in this paper differs from previous literature mainly in four aspects: it quantifies the integration decision under demand uncertainty; its model determines critical demand quantities as the trigger moment for a capacity investment; it examines the impact, on the trigger moment, of the uncertainties in demand for products; and its model incorporates positive shocks impacts in products' demand, making a closer approach to the reality.
Keywords
Citation
Fernandes, R., Gouveia, B. and Pinho, C. (2012), "Vertical integration moment in dynamic markets", Strategic Outsourcing: An International Journal, Vol. 5 No. 2, pp. 121-144. https://doi.org/10.1108/17538291211257583
Publisher
:Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited