Vertical integration is a business strategy in which a company takes ownership of various stages of its production process, rather than relying on external suppliers. It involves integrating and owning the supply chain of a company, where each member of the supply chain produces a different part of the product. Vertical integration can be broadly categorized into two types: backward integration and forward integration. Backward integration occurs when a company takes ownership of its suppliers, while forward integration occurs when a company takes ownership of its distributors.
Vertical integration is often associated with vertical expansion, which is the growth of a business enterprise through the acquisition of companies that produce the intermediate goods needed by the business or help market and distribute its product. This expansion is desired because it secures the supplies needed by the firm to produce its product and the market needed to sell the product.
Contrary to horizontal integration, which is a consolidation of many firms that handle the same part of the production process, vertical integration is typified by one firm engaged in different parts of production (e.g., growing raw materials, manufacturing, transporting, marketing, and/or retailing) . Vertical integration is the degree to which a firm owns its upstream and downstream suppliers and distributors.
Vertical integration can be difficult to capitalize on, as it is costly, complex, and not easily undone. However, when well executed, it can confer a number of advantages, including greater control, reduced costs, increased profitability, better product or service quality, increased customer and market insights, and more.
