The two-stage decision model of vertical integration

Purpose: The aim of this paper is to develop a two‐stage decision model of vertical integration by breaking down integration decisions into two stages: extent of integration and direction of integration. Design/methodology/approach: The study uses price premium as a proxy for differentiation‐based competitive advantage. The relationship between the extent of vertical integration and price premium through a vehicle of consumers' brand perception is explored. A segmentation‐based analysis is performed to study whether different vertical integration configurations are related to price premiums at different levels. Findings: Vertical integration relates positively to price premium set by apparel companies; consumers' perception of brand quality mediates the relationship. Findings also suggest that an organization should opt for integration if vertical integration generates greater effect on price premium as relative to the cost. Strength of internal and forward integration is related strongly to higher price premiums than integration balance. Research limitations/implications: Further research is encouraged to test if the findings of this study can be generalized to other industries and/or other types of supplier relationship integration, e.g. partnership, strategic alliance and joint venture. Originality/value: As a departure from extant literature, it is argued that vertical integration is a viable strategy that enables companies to gain differentiation‐based advantage. A conceptual model is developed and applied to the apparel industry, which explains critical issues involved in the design of supply chain structures.