Week 3 Ray et al Yiran

Extant data contradict previous research that the level of vertical integration (VI) has increased rather than decrease with the increasing use of information technology (IT). To address this gap, this paper studies the moderating impact of two measures of competitive environment, demand uncertainty, and industry concentration, on the relationship between IT and VI.

The authors adopt firm level IT spending data from 1995 to 1997 drawn from InformationWeek 500 that had been used in prior research. Matching them with data from other sources, a 2-euation model is used for this paper to address endogenous issue between VI and IT. The results of their analysis show that when demand uncertainty is high or industry concentration is low, IT is associated with a decrease in VI.  I. The reason is that IT provides the agility to coordinate with different external partners and specialists. While when in concentrated and in more predictable demand environments, IT may be associated with an increase in VI as firms use IT to coordinate more activities inside the firm to increase revenue, and capture value-add and margin.

This article contribute to the literature by showing the difference in the use of IT across different competitive environments. The implication of this research is that the level of VI may be chosen strategically, given the nature of the competitive environment, which also entails the need for further analysis. Also, since coordination efficiency and effectiveness is possible to affect production costs, future research must explore in greater detail how technology driven coordination and production activities interact, and the implications of this interaction for the level of VI.