A Microeconomic Model of the Focused Factory-Vertical Integration Strategic Decision Problem

ABSTRACT The design of a manufacturing strategy incorporates the decision of whether to focus or vertically integrate, or adopt a policy somewhere between the two extremes. Unfortunately, the literature contains few models that aid a manager in this decision process. In this paper we design a model...

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Bibliographic Details
Published in:Decision sciences 1993-01, Vol.24 (1), p.209-217
Main Authors: Tannous, George F., Mangiameli, Paul M.
Format: Article
Language:English
Subjects:
and Strategy and Policy
Capital assets
Capital-Asset Pricing Model
CAPM
Corporate Finance
Decision making models
Economic Analysis
Management decisions
Manufacturing
Mathematical analysis
Microeconomics
Optimization
Vertical integration
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Summary:ABSTRACT The design of a manufacturing strategy incorporates the decision of whether to focus or vertically integrate, or adopt a policy somewhere between the two extremes. Unfortunately, the literature contains few models that aid a manager in this decision process. In this paper we design a model to evaluate and compare various strategic alternatives along the focused factory‐vertical integration continuum. By defining a point along this continuum as the percent of components manufactured internally that are needed to make one finished item (where 0 indicates complete focus and one manufacturing step, and 1 indicates full integration and 100 percent internal manufacturing) we are able to delineate the effects of the alternative decision strategies on flexibility and the firm's cash flow. The capital asset pricing model is invoked to assess the impact on the firm's risk and value.
ISSN:0011-7315
1540-5915
DOI:10.1111/j.1540-5915.1993.tb00471.x