Designing the Boundaries of the Firm:From “Make, Buy or Ally” to the Dynamic Benefits of Vertical Architecture

The concept of “vertical architecture” defines the scope of a firm and the extent to which it is open to final and intermediate markets. A firm can make or buy inputs, and transfer outputs downstream or sell them. Permeable vertical architectures are partly integrated and partly open to the markets along a firm’s value chain. Increased permeability enables more effective use of resources and capacities, better matching of capabilities with market needs and benchmarking to improve efficiency. Partial integration promotes a more dynamic, open innovation platform and enhances strategic capabilities by linking key parts of the value chain. This permeable vertical architecture, accompanied by appropriate transfer...