Vertical and Horizontal Expansion in Value-based Models

Strategy research has often treated vertical integration and diversification strategies as independent topics. Using a biform model, this paper reconciles the existing chiasm by examining the simultaneous interplay between vertical and horizontal corporate strategies. I find that firms in a classical Williamsonian scenario characterized by “small numbers”, transaction-specific investments, ex ante vertically integration decisions, and ex post bargaining do not necessarily prefer vertical integration to market transactions. Conversely, if one firm in the economy can develop a valuable, rare, inimitable, and non-substitutable resource that favors synergies from horizontal expansion strategies, said firm does strictly prefer vertical integration. Overall, I show that vertical and horizontal corporate strategies may be complements even when governance and production costs increase disproportionately to firm size.