A BSTRACT
6. CONCLUSION
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firms have a product where the complexity in the final product markets are so valuable that it is insensitive to minor developments in product complexity in the distribution industry. Yet, other manufacturing firms may be faced with increasingly complex and dynamic market contexts for their final products that they are gradually forced to consider a new governance approach more that is appropriate to deal with complex distribution. Major changes in the market of final users may increase product complexity over time, and disruptive competitive innovations in distribution may cause dramatic changes on demand conditions that require a shift from directional to complex distribution. For a path dependent manufacturing firm operating a directional distribution the requirement to innovate in downstream advanced value, adding activities exploring for new resources and capabilities can pose severe challenges (Galbraith, 1983, Nooteboom, 2004; Teece, 2010; Teece, Pisano and Schuen, 1997). Accordingly, empirical studies (Benedettini, Neely and Swink, 2015; Gebauer, Fleisch and Friedli, 2005; Neely, 2008;
Visnjic, Weingarten and Neely, 2016) find that manufacturing firms often struggle with the transformation from being driven by the manufactured product into profiting from downstream complex value adding activities.
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competences in the downstream distribution industries can vary greatly. In addition, the economic literature on firm boundaries provides conflicting perspectives on the financial rationales for forward integration. The directional distribution context is often applied in forward integration analysis to improve internal monitoring that can in turn reduce incentive misalignment and moral hazard costs. In contrast, the complex distribution context points to segregated asset ownership that provides incentives for entrepreneurial activities as residual claimants to own difficult to monitor efforts. Forward integration into complex distribution represents the highest possibility to create strategic advantages from product differentiation and improved customer relationships. However, the mutually interdependent long-linked activities also create the highest risk of failure due to the potential of moral hazards and distorted incentives inside the integrated value chain.
Future research and limitations
The managerial challenge of complex distribution where economic boundary theories advocate segregated asset ownership, and the difficulty of forward integrated manufacturing firms to turn this endeavor into profits, pinpoint the difficulties associated with ex post integration (Zhang and Banerji, 2017). The governance approaches discussed relate to delegation of authority and the incentives provided to manage the long-liked interdependencies between sequential business activities. This occurs when the corrective power of markets and segregated ownership of assets is muted. This inquiry into the underlying economic rationales arguing for forward integration identify potential theoretical contradictions and show the complexity of determining the proper governance approach, as demonstrated by the mixed performance of integrated manufacturing firms. Hence, there is a need to gain deeper insights into the decision processes adopted by contemporary manufacturing firms that engage in forward integration and better understand how different governance approaches are adopted with diverse performance outcomes. Conducting detailed case studies of representative firms seem to be a promising avenue to provide a better understanding on how firms govern interdependent value chain activities, along with the reasoning adopted to explain why certain approaches and structures are adopted (Yin, 2018). For this purpose, we modestly suggest that the identified directional and complex distribution contexts can serve as useful typologies to frame both single and comparative case study approaches.
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It has not been the aim of this article to claim that one distribution type is superior to another. The goal has rather been to bring attention to the complexity of guiding different distribution types that cater to different, and sometimes conflicting rationales for forward integration. But that nonetheless have real performance implications for contemporary manufacturing firms. If the integrated manufacturing firms are misaligned with the demands of the final users of their products and fail to implement a governance structure that properly engages the valuable contributions from distribution, it can have severe consequences for the profitability and viability of those companies.
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