Choice of Vertical Firm Boundaries

ETC has been the dominating theoretical lens for analyzing firm boundary design choices. Further research reported several limitations to ETC. The Limitations Include low explanatory power of ETC In industries characterized by weak price competition (Nickering and Silverman 2003) and innovative environment (Welter and Evolves 2008) . The relationship between uncertainty and vertical integration has also been challenged (Dyer 1 996, Hotter 2005, schilling and statesman 2002, walker and Weber 1984,Welter and Evolves 2008). Other limitation of Tee's explanatory power is its narrow level of analysis. ETC looks at â€Å"one transaction at a time†, therefore it neglects interdependencies of boundary choices and is not sufficient to explain the overall firm boundaries. A number of papers elaborated on that deficiency (e. G. Argyles and Liabilities 1 999, Parmigianino and Mitchell 2009). Capabilities approach provides a complementary explanation to understanding firm boundary choices. Tech (1986, 996) argues that decisions of firm scope are related to firm capabilities and profiting from them in the best way. Capabilities approach scholars propose that firms focus on functions that represent the core of their competitive advantage based on superior capabilities and resources formed over time as a result of path-dependent learning process, and outsource non-core capabilities (e. G. Aragua et al. 2003). Further they argue that firms tend to specialize in activities where they have some comparative advantage Cabooses