The Limits of the Market: Vertical Re-integration, Explained

Drawing from archival and qualitative data from the UK building construction industry, we develop an inductive framework that explains why industries gravitate for long periods around vertical specialization; and how and why they shift from specialization to reintegration. First, we observe that various industry groups, including professionals and their associations, play an active role in shaping the nature and the boundaries of the industry. As each type of industry participant develops its own, path-dependent knowledge base, the institutional structure of production tends to be reinforced through co-specialization and the creation of the institutional background. However, pressures for re-integration appear when the vertically specialized architecture is no longer able to respond to the market needs, because of the excessive compartmentalization. The gap between needs and capabilities sets in motion a slow process of de-legitimization of the old structure, and institutionalization of the potential new, re-integrated structure. This process is facilitated by broader social changes (e.g. the reduction of protection vis-à-vis the professions), and by the lobbying of industry participants who hope to ameliorate their strategic position through re-integration. We find that re-integration is driven by firms that try to avoid commoditization by leveraging or protecting their knowledge base; or by bundling new services onto their existing offerings. Our analysis suggests that agency, strategizing, and knowledge bases shape and are shaped by the boundaries of the industry and the markets within it.