Evolution Through Dis-integration
How the future of the financial services industry will be shaped by dramatic changes in the value chain
Industries typically evolve along common paths and consolidate as they become more mature. In this consolidation, we see leading players vertically disintegrate their value chains in a bid to become “leaner” and more competitive. Vertical dis-integration is defined as the emergence of new intermediate markets that divide a previously integrated process between specialized areas. This division of responsibility allows a firm to specialize and concentrate on the parts of its business where it has a competitive advantage to help reduce costs and increase profitability.
In his article “The Nature of the Firm,” Ronald Coase argues that businesses tend to expand until the costs of organizing an extra transaction within a company become equal to the costs of carrying out the same transaction by means of an exchange in the market. Thus, business units that produce goods or services that can be acquired in the market at lower prices tend to be dis-integrated.
The article can be found in Economica, New Series, Volume 4, Issue 16 (Nov., 1937), pages 386-405.