Manufacturing and Marketing: Vertical Integration in the U.S. Tire Manufacturing Industry, 1890-1980s

Forward integration has been explained both as a method of achieving monopoly power and as a source of greater efficiency [6, 16]. An efficiency perspective underpins the work of Chandler and Williamson who regard vertical integration, particularly into distribution, as a crucial step in the creation and success of large firms. While their views have moved closer, Chandler and Williamson emphasize different motives for forward integration [4, 13]. Technology provides the fundamental dynamic in Chandler's account while Williamson concentrates on responses to the uncertainties of contracts. Four propositions are advanced about motives for integrating manufacturing and distribution. First, Chandler identifies a phase in which new capital-intensive technology and mass production promote large firms in certain industries. Thus, "... the initial step in the creation of the modern industrial enterprise was the investment in production facilities large enough to achieve the cost advantages of scale and scope" [13, pp. 489-90]. The result is a technical imperative to maintain volume in manufacturing by integrating forward into distribution. Williamson assigns less importance to production and considers that a given technology may be consistent with differing degrees of integration. Second, Williamson [16] emphasizes transaction costs and asset specificity. Manufacturers are assumed to possess limited knowledge while independent distributors eek personal advantage at the producer's expense in any contract. The basic motive for forward integration is to improve the manufacturer's information and decision-making while reducing opportunism. Third, Chandler and Williamson agree that the threshold for forward integration isreduced where products require specialist marketing or after-sale services because these diminish the independent distributor's advantage (economy of scope) in selling the item within a broad product range [4, pp. 67-69; 17, pp. 111-14]. Thus, Chandler asserts that: "When a manufacturer's volume attained a scale that would reduce the cost of transporting, storing, and distributing his products to the level of that achieved by the wholesaler through volume economies, the intermediary lost his cost advantage" [13, p. 487]. Forward integration ensues but conceivably lags behind the initial achievement of mass production. Fourth, Chandler and Williamson rely on a survivors' test: the strategy which emerges or persists in the long term is assumed to be efficient or at least more efficient than any existing alternative. In this context Chandler stresses the importance of creating a management structure whose ffectiveness in coordinating product flows crucially affects overall performance and responsiveness to technical pressures and incentives. Sound strategy and solid structure still require