The Dynamic Limits of Specialization: Vertical Re-Integration Reconsidered

Abstract

Existing studies, largely based in the transaction cost economics tradition, approach the issue of vertical scope from the point of view of the decision faced by the individual firm about whether to make or buy, given a set of existing markets and well-defined vertical segments. However, recent research has shown that the very ability to make or buy should not be taken for granted. We argue that this is not only the case for dis-integration, but also for re-integration, which often implies the need for new "all-in-one" markets. Drawing on the analysis of the recent trend toward re-integration in the British building industry, we develop an inductive framework that explains why industries, after going through long periods of vertical specialization, shift to vertical re-integration. First, we observe that various industry groups, including professionals, play an active role in shaping the nature and the boundaries of the industry, facilitating the onset of vertical specialization. This vertical division of labour, in turn, shapes a number of increasingly distinct knowledge bases in the industry; it also defines the trajectories along which capabilities evolve over time. Over time, specialization in scope begets specialization in knowledge, and may inadvertently lead to excessive compartmentalization. The gap between what the vertically specialized system can produce and what the market demands sets in motion a process of experimentation with integrated service provision. The emergence of re-integration may be facilitated by broader social forces such as the de-institutionalization of professions, or changes in demand structure. It is also driven by the agency of firms which through re-integration seek to protect their position; enter new, related markets; or find new ways of leveraging their capabilities. We thus show how and why firms strategize to change their institutional environment and help create new markets.

Keywords: Markets, Vertical Scope, Evolution, Integration, Strategic, Knowledge Base, Capability, Construction Industry

JEL Classification: L22, L23, L74, D21, D23, D24, L14, M21