"Manufacturing, Forward Integration and Governance Strategy"

In value chains the purpose of the different industry stages, with discrete resources and capabilities, is to transform raw material into final products and services in markets for end-users. In this context manufacturing firms face increasing pressure on generated profits. As national economies develop so does the importance of service related activities which present an opportunity for manufacturers to compensate declining profits by integrating forward. However, when manufacturing firms contemplate forward integration this presents challenges that are different to those they face when marketing own manufactured products. The theoretical rationales applied to help analyze the economic effects from forward integration are complex and sometimes provide conflicting recommendations. The related challenges, when substituting market transaction with a hierarchy, are supported by the empirical literature on manufacturers’ forward integration that shows very different profitability effects. Hence, for manufacturing firms to integrate forward into distribution and services this requires consideration of different economic rationales that not always work in concert but also the implementation of according governance mechanisms to ensure economic profits. The purpose of this PhD is to inquire into “how forward integrated manufacturing firms effectively govern their integrated distribution activities under different market conditions”?
To answer this question, this study begins by analyzing the complexity of value chains and what separates the different industry stages. To understand the challenges related to forward integration two streams of literature is synthesized. This relates to the theoretical and empirical boundary literature as well as lead firms within global value chains. From this, two distribution archetypes, directional and complex distribution, in addition to spot market transactions, is condensed and the corresponding interdependency differences are presented in chapter two. Chapter three progresses the discussion by considering the interdependency differences and what are the governance implications following forward integration. These first two chapters provide guidance to inductively collect data related to forward integration and governance. To understand the initial integration rationale and governance today, governance is here considered more in its wholeness. A qualitative case study methodology serves as the foundation for collecting data by using two manufacturing firms within the same industry that both have pursued a strategy of forward integration but with vastly different performance. The study show that while forward integration can be very challenging it can also, when governance instruments are aligned to the distribution context, provide sustained competitive advantages.