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Home - Industry
Mapping - Industrial Organisation
Industry Mapping
Industrial Organisation, Vertical Integration and Vertical
Specialisation
From the point of view of economics and business strategy a layer model
has additional advantages. At the most general level, by highlighting the
interdependencies, a layer model helps to identify the activities that need to
be undertaken in order to deliver the final outputs of the system. This leads
on to an economic analysis of industrial organisation by examining questions
such as who does which activities and why, and how are the activities
undertaken by different organisations co-ordinated. In this way the role of
markets and other forms of co-ordination may be analysed. This kind of analysis
suggests that the combined layers may be thought of as an 'industry' as a
result of the rich interdependencies that exist. The work of George Richardson
has been particularly useful in providing insights into these kinds of
questions - see Site Bibliography.
At a more specific level, economists have found layer models useful as a
conceptual aid in analysing questions of vertical integration and vertical and
horizontal specialisation. Vertical integration may be thought of as taking
place when a company involved in one layer decides to become involved in
another layer, usually one immediately above or below. On the other hand,
vertical specialisation occurs when companies decide to confine their
activities to only one or a few layers. Horizontal specialisation occurs when
different companies specialise in different areas in the same layer.
In the telecoms industry important questions arise regarding vertical
integration and vertical specialisation. To some extent the importance of these
questions can be captured by analogy through an examination of the evolution of
the computer industry. Briefly, in the mainframe and minicomputer era the
dominant companies like IBM, Fujitsu and DEC were vertically integrated,
researching, designing and producing their own semiconductors, operating
systems and applications software, and undertaking their own assembly,
marketing, sales and distribution.
The transition to the PC and networking era, however, also witnessed a
change in industrial organisation to one of vertical and horizontal
specialisation. Specialist firms came to dominate the various layers of the
computer industry: for example, Intel in the microprocessor part of the
semiconductor layer and Japanese - later joined by Korean and Taiwanese -
companies in the memory part of this layer. Microsoft dominated the PC
operating system layer. Specialist assemblers and distributors like Compaq and
Dell took over the assembly and distribution layer. A large number of
specialist companies were active in the applications software layer while a
significant part of the marketing, sales and distribution layer was contested
by other specialist retailers. More recently, information appliances, including
handheld mobile voice and computing devices, have added to the complexity of
the computer industry and brought in new groups of specialists such as
Ericsson, Nokia and Psion. It is clear that largely through inherent economies,
vertical and horizontal specialisation has brought an additional dynamism to
the computer industry.
Will the telecoms industry which was characterised by vertically
integrated monopoly companies - such as AT&T, BT, France Telecom, Deutsche
Telekom, and NTT - until liberalisation began in the mid-1980s become
vertically and horizontally specialised like the computer industry? Or will the
telecoms industry, after a short period characterised by the appearance of some
vertical and horizontal specialisation, revert to vertical integration? More
specifically, will companies whose main activity involves running networks move
increasingly into the higher services layers of the industry? And what does the
future hold for the group of specialist facilities-less service providers that
have emerged in the industry over recent years?
These questions are analysed in more detail in
Key Questions . For recent debates on vertical integration and vertical
specialisation in the industry see the references to the papers by Gong and
Srinagesh, and by Kavassalis and Lehr in Site Bibliography
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