TOWARD AN INTEGRATIVE MODEL OF SUPPLY CHAIN MANAGEMENT: PRODUCT LIFE CYCLE AND ENVIRONMENTAL VARIABLES by Peter W. Stonebraker, Ph.D. Professor of Operations Management (773) 442-6124 (773) 442-6110 (F) [email protected]and Jianwen Liao, D. B. A. Assistant Professor, Management (773) 442 6136 [email protected]both of the College of Business and Management Northeastern Illinois University 5500 N. St. Louis Ave. Chicago, Illinois 60625 submitted to: The Editors Production Operations Management Society Conference Proceedings submitted electronically to [email protected]NLT: 31 January, 2003
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TOWARD AN INTEGRATIVE MODEL OF SUPPLY CHAIN MANAGEMENT: PRODUCT LIFE CYCLE AND ENVIRONMENTAL VARIABLES
by
Peter W. Stonebraker, Ph.D.Professor of Operations Management
In the aggregate, then, the body of research suggests that alignment of life cycle stage with
dimension of integration is critical to reduce inconsistency and improve efficiency. Successful
supply chain integration, in effect, depends upon an investment in process technology and
organization flexibility, which extends the life cycle. Brewer & Hensher (2001, p. 18) found “a
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strong complementarity between logistics strategy and key business practices” including operations
and supply chain integration.
For example, the supply chain integration effort of a product/process in the birth or growth
stage would be expected to pursue extensive breadth integration because that is more consistent with
the lower volume, job shop, smaller competitor, flexibility-focus, and other characteristics of “early
stage” life cycles. Thus, “later stage” life cycles are expected to be associated with less breadth.
Organizations that select the innovator strategy would be expected to actively pursue a breadth
strategy. Based on this rationale, we propose:
H1: As firms move from start-up/growth stages to mature/decline stages, the less the breadthof supply chain integration.
Duncan (1972) contends that managers facing a more complex (i.e., heterogeneous)
environment will perceive greater uncertainty and have greater information processing requirements
than managers facing a simple environment. Dess and Beard (1984) also suggest that organizations
competing in industries that require many different inputs or that produce many different outputs
(high complexity) should find resource acquisition or disposal of output more complex than
organizations competing in industries with few different inputs and outputs. Consequently, we
expect that firms operating in highly complex environments would focus on fewer activities in a
particular stage of value chain in order to compete more effectively. Therefore, as firms evolve from
early stages to late stages of product life cycle, we would expect the breadth of supply chain
integration to be narrower in a highly complex environment than in a simple environment. The
greater the environmental complexity, the greater the negative impact of product life cycle on the
breadth of supply chain integration. Based on this rationale, we propose:
H1a: The negative impact of product life cycle on breadth of vertical integration is greater inmore complex environments than in less complex environments.
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A munificent environment permits organizational growth and stability, which in turn, may
generate slack resources (Cyert & March, 1963). These slack resources can provide a buffer for the
organization during periods of relative scarcity, such as the stable state and decline stages of product
life cycle. Therefore, we expect that firms operating in a munificent environment would be less
compelled to focus on fewer activities in a particular stage of value chain (breadth) as compared to
those operating in a scarce environment. Based on this rationale, we propose:
H1b: The negative impact of product life cycle on breadth of vertical integration is greater inlow munificent environments than in high munificent environments.
As firms move from early to later stages of the life cycle, they would be expected to pursue a
greater degree of supply chain integration because those firms are standardizing products and
processes toward a dominant design, and consolidating and competing on price in stable markets.
Such a strategy would encourage firms in this situation to increase the depth of an already generally
inflexible process so that they could more completely benefit from the scale economies of using
existing processes to achieve greater volumes. Organizations that select the volume producer
strategy would likely pursue a depth integration effort because that strategy would require less cost
to be recovered in the short life cycle period available. Based on this rationale, we propose:
H2: As firms move from emerging/growth stages to mature/decline stages, the greater thedegree of vertical integration.
Aldrich (1979) contends that increase in the environment’s structural complexity would
increase the need for a firm’s strategic activities. In more complex environments, firms are more
likely to rely on internal transactions to minimize uncertainties of dealing with external suppliers.
Moreover, environmental complexity also describes both the number of units that require interaction
and the amount of knowledge about products and customers that the manager must secure. For this
reason, to assure efficiency and effectiveness, we expect a greater degree of supply chain integration
in more complex environments than in simple environments. Based on this rationale, we propose:
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H2a: The positive impact of product life cycle on degree of vertical integration is greater inhigh environmental complexity than in low environmental complexity.
In hostile or non-munificent environments, scarcity of resources forces firms to pay greater
attention to resource conservation. This effort would, in turn, compel them to depend on transactions
with other business divisions (degree). The increased transactions among business divisions within
the firm provide much needed resources for survival in a resource scarce environment. Alternatively,
when the environment is munificent and resources are abundant, the pressure for the firm to transact
within is less. Therefore, we would expect greater degree of supply chain integration in a scarce
environment than in a munificent environment. Based on this rationale, we propose:
H2b: The positive impact of product life cycle on degree of vertical integration is greater inlow munificent environments than in high munificent environments.
Finally, as an organization grows from the early stages to the later stages of the product life
cycle, it may want to control a greater number of vertical integration stages to better manage the
efficiency of its supply chain. This extension of the supply chain to additional stages will likely be
more costly than merely increasing the depth of existing integration efforts; thus, stages would be
expected to increase when no further depth was achievable. Further, process shifter organizations
would likely pursue a stages integration strategy as they shifted from product innovation to process
innovation. Of course, this is a risky decision, however, the firm is simultaneously making several
other strategic shifts and would want to achieve consistency as it evolved. Based on this rationale,
we propose:
H3: As firms move from emerging/growth stages to mature/decline stages, the greater thestages of vertical integration.
Organization theorists have extensively studied the impact of the environment on
organizational strategy and processes. They emphasize the need for organizations to adapt flexibly
or buffer themselves from increasingly turbulent and complex environmental conditions (Thompson,
1967). Companies faced a more complex environment will tend to have a more flexible and simple
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structural arrangements such as focusing on a few key activities in a value chain and outsourcing
other less important activities. Therefore, when two firms are at the same stage of product life cycle,
we expect that the firm competing in a more complex environment will be less likely to be vertically
integrated than the firm in a simple environment. Based on this rationale, we propose:
H3a: The positive impact of product life cycle on stage is greater in highly complexenvironments than in simple environments.
Relative scarcity of resources in existing markets increases the risk of remaining in those
markets and increases the need to expand operation into new markets, thereby reducing dependence
on existing domains (Hannan & Freeman, 1977). Thus, firms expand into market with more
munificent environments as a way to balance overall risk (Bettis, 1981). Expansion into related
markets is easier to achieve than that into unrelated markets, especially considering that related
diversification overall would outperform unrelated diversification. Therefore, in a munificent
environment, as a product evolves along its product life cycle from emerging / growth stage to
mature / decline stage, a firm is less likely to vertically integrate into other markets in a munificent
environment, as compared to a firm in a scarce resource environment. Based on this rationale, we
propose:
H3b: The positive impact of product life cycle on stage is greater in low munificentenvironments than in high munificence environments.
Thus, the innovator is associated with early life cycle stages and is hypothesized (H1) to
pursue a breadth integration strategy, the volume producer is associated with the later life cycle
stages and is hypothesized (H2) to pursue a depth integration strategy, and the process shifter
transitions from early to late life cycle stages and is hypothesized (H3) to be associated with the
stages strategy. These relationships and the effects of moderating variables are depicted in Figure 4.
This paper has pursued the notion that, for efficiency and success, a strategic fit must exist
between operations, integration, and environmental variables. That fit would attenuate “bullwhip”
inefficiencies, either of inventories and other mechanical decisions or of the less tangible, human
interactive sort. As such, this paper represents a cross-functional and interdisciplinary approach to
strategic management theory by identifying and facilitating appropriate operations decisions
pertaining to the contingencies of supply chain interaction. In that pursuit, this study makes a
number of contributions, yet simultaneously has some limitations.
This study is one of the first to posit and define the relationship between the strategic
management notion of vertical integration and the operational concept of supply chain integration.
Though there are definitive differences in the focus of these two disciplines and the corresponding
research efforts that have emerged, clearly supply chain integration is an applied and operationalized
approach of the more theoretical and strategic notion of vertical integration.
Additionally, numerous studies have defined the supply chain and vertical integration
variables as unidimensional and static; however, this study, following recent analyses, addresses
vertical/supply chain integration as a continuous and multidimensional variable. Further, we argue
that stage of the product life cycle determines a firm’s vertical integration strategy, and that impacts
are moderated by an environmental complexity and munificence. This research did not find prior
studies that have addressed either the relationship of product life cycles to integration variables or
environmental factors as moderators of the relationship between life cycle variables and the
integration variables. This study, then, suggests and dimensionalizes the relationships of moderating
variables to the primary independent and dependent variables.
This study does, however, have several notable limitations. Of course, this paper has focused
on the model building, dimensionalization, and hypothesis-positing activities only. Given that the
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currently available research focuses primarily toward descriptive and characterization, with some
measurement of integration variables, this study is an initial attempt to provide a theoretic
foundation and model of the supply chain. It has not developed or operationalized a high-confidence
test of the model. That work is yet to be done.
Certainly the omission of several variables, such as the form dimension of integration and the
uncertainty and dynamism variables of the environment, detracts from the overall scope of the
model. These variables are likely entwined with those of the present study and should be pursued,
both separately and in concert, in future efforts. Of course, there is a tradeoff between the
preciseness of the definition of a study and the manageability of a study. The more variables that are
described, the greater the number of potential hypotheses, and, as the study moves toward empirical
testing, the larger and more complex the survey, the sampling processes, and the method.
This study is an example of a cross-disciplinary and cross-functional analysis that is
increasingly relevant to the more dynamic and integrated environment of global business. It
establishes the foundations for numerous future conceptual and empirical research efforts. The
environmental variables of dynamism and uncertainty, as well as the form dimension of vertical
integration should be the focus of further conceptual research to establish the nature and strengths of
their interrelationships with current study variables. Further, this study begins the process of
evaluating and diagnosing situational variables focused toward answering the questions: under what
environmental and operational circumstances should management pursue supply chain / vertical
integration, at what costs, and with what expectancies for success?
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Table IGeneral Classification of Vertical Integration and Supply Chain Integration
Vertical Integration Supply Chain Integration
Emphasis Theory ApplicationOriginal discipline Strategic Management Logistics ManagementFunctional foundation Economics, finance Distribution, communicationEntity Corporate Activities or workcellsEntity Size Generally large Any sizeMeasures Efficiency of flow Smoothness of flowIntegrating mechanism Ownership, quasi-ownership CoordinationProcess Control CollaborationRate of Change More static More dynamicParadigm Consistency Irregularity
Uniformity
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Figure 1
A Stylized Representation of the Supply Chain
40% 90%
Create Raw
Materials
Manufac-ture Parts
Assemble Finished Goods
Distribute Finished Goods
Customer Info &
Service
Risk Analysis - Projecting Customer Design & Volume Information
Cost Analysis - Inventory Availability & Timing Information
Customer Service
Expectations
Breadth Stages
Degree Form (Ownership) (Collaboration)
Note: The four Harrigan (1985) dimensions of stages, breadth, degree and form aresuperimposed in dotted lines.
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Figure 2
An Integrative Model of Supply Chain Management
Stage of ProductLife Cycle
Dimensions ofIntegration
Breadth
Degree
Stages
Environmental Complexity
EnvironmentalMunificence
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Figure 3
The Relationship of Process and Product Life Cycles
PRODUCT Variety Extensive Increasing Emergence of a High
Standardization Dominant Design Standardization Volume Low Volume Increasing High DecliningPROCESS Organi- Fixed Production Small Batch Line Flow Continuous zation Job Shop Assembly Process Innovation High flexibility Medium Medium Low flexibility Integration Low Medium Medium HighINDUSTRY Structure Small Competitors Consolidation Few Large Firms "Survivors" Competitive Product/Process Quality and Price and Price Criteria flexibility Availability DependabilityENTRY/EXIT STRATEGY
#1 Innovator #3 Volume Producer
#2 Process Shifter
Note: The extent of product and process innovation (Abernathy & Utterbach, 1975) and generic entry / exit strategies (Hayes &Wheelwright, 1979b) are superimposed on this diagram.
$ Product, service,materials innovation Process technology,