What Is Vertical Integration?

Vertical integration is a strategy that companies use to streamline their operations. It involves taking ownership of various stages of its production process. Companies achieve vertical integration through 澳洲幸运5官方开奖结果体彩网:mergers or acquisitions or establishing suppliers, manufacturers, distributors, or retail locations rather than outsourcing them. Vertical integration often requires significant initial 澳洲幸运5官方开奖结果体彩网:capital investment.

How Companies Use Vertical Integration

A company can broaden its footprint across the 澳洲幸运5官方开奖结果体彩网:supply chain or manufacturing process with vertical integration, allowing for more self-reliance on aspects of the process. Vertical integration lets manufacturers directly source raw materials or sell products to consumers.

The supply chain or sales process typically begins with 澳洲幸运5官方开奖结果体彩网:raw materials from a supplier and ends with the final product to the customer. Vertical integration requires a company to buy or recreate a part of the 澳洲幸运5官方开奖结果体彩网:production, distribution, or retail sales process🃏 that was previously outsourced෴.

Companies can vertically integrate by purchasing their suppliers to reduce manufacturing costs. They can invest in the retail end of the process by opening websites and physical stores. They can invest in warehouses and fleets of vans to 澳洲幸运5官方开奖结果体彩网:control the distribution process.

Types of Vertical Integration

• Backward Integration: A company seeks to acquire a raw material distributor or provider at the beginning of a supply chain. 澳洲幸运5官方开奖结果体彩网:Backward integration moves the ownership control of its products to a point earlier in the supply chain or the production process. A furniture retailer may seek to acquire a wood distributor or a furniture manufacturer.
• Forward Integration: A company expands control of the distribution process and sale of its finished products with 澳洲幸运5官方开奖结果体彩网:forward integration. A clothing manufacturer who sells its finished products to a 澳洲幸运5官方开奖结果体彩网:middleman, who then sells them in smaller batches to individual retailers may join a retailer and be able to open stores. Forward integration is less common because it is often more difficult for companies to acquire others along the supply chain. For example, the largest retailers at the end of the supply chain have the greatest 澳洲幸运5官方开奖结果体彩网:capital on hand to be the acquirer.
• Balanced Integration: A company merges with companies both before it and after it along the supply chain. A company must be the middleman and manufacture a product in balanced integration. Consider the supply chain process for Coca-Cola (KO) where raw materials are sourced, the beverage is made, and bottled drinks are distributed for sale. Should Coca-Cola merge with its raw material providers and retailers that sell the product, the company engages in balanced integration. Due to the 澳洲幸运5官方开奖结果体彩网:diversified nature of business operations, balanced integration helps a company control the entire supply chain process.

ღAdva🐓ntages and Disadvantages of Vertical Integration

Vertical integration helps companies gain greater control over the supply chain and manufacturing process, leading to lower costs, economies of scale, and less rel🐟iance on external parties. Through verticꦺal integration, companies can circumnavigate external monopolies.

Companies that vertically integrate begin a long-term process that requires widespread buy-in. This also includes heavy upfront 澳洲幸运5官方开奖结果体彩网:capital expenditure requirements to acquire the proper company, integrate new and existing systems, and ensure that staff is trained across the 🔯manufacturing or delivery proces෴s.

Because companies commit capital to a specific process or product instead of an external vendor, a company will likely have committed money that cannot be easily recovered. In addition, a company may lose the opportunity to gain uniqu🎐e knowledge through different external vendors.

Vertical Integration vs. Horizontal Integration

Vertical integration involves 澳洲幸运5官方开奖结果体彩网:acquiring a key component of the supply chain that the company has previously contracted for. It may reduce the company’s costs and give it greaܫter control of its products. Ultimately, it can increase the company’s profits.

澳洲幸运5官方开奖结果体彩网:Horizontal integration, on the other hand, involves the acquisition of ♋a competitor or related business. A company may do this to eliminate a rival, diversify its core business, expand into new markets, or increase its overall sales.

꧟While a vertical integration strategy stretches a company along a single process, horizontal integration is a more pointed approach that causes a company to become more specific or niche within a certain market.

Examples of Vertical Integration

Netflix (NFLX) is an example of vertical integration. The company started as a DVD rental business before moving into online streaming of films and movies licensed from major studios. As of 2024, the company uses its distribution model to promote its original content alongside programming licensed by studios.

The merger of Live Nation and Ticketmaster in 2010 created a vertically integrated entertainment company that manages and represents artists, produces shows, and sells event tickets. The combined entity manages and owns concert venues, while also selling tickets to the events at those venues.

The fossil fuel industry is another case study in vertical integration. British Petroleum (BP) and Shell (SHEL) have exploration divisions that seek new sources of oil and subsidiaries that are devoted to extracting and refining it. Their transportation divisions transport the finished product. Their retail divisions operate the gas stations that deliver their product.

Explain Like I'm Five

Vertical integration is a strategy where a company buys up multiple businesses 🦩at different stages of its supply chain. For example, a restaurant might buy a 🔯farm to ensure a steady supply of produce, or an oil company might buy a shipping company for transportation.

Vertical integration allows companies to reduce their costs and streamline their operatio🎉ns. Instead of buying necessary materials on the open market, they act as their own suppliers and take control over the production process.

The Bottom Line

Vertical integration is a business arrangement in which a company controls different stages along the supply chain. Instead of relying 💟on external suppliers, the company strives to bring production processes in-house. Though vertical integration may result in increased upfront capital outlays, the goal is to streamline processes for more efficient and controlled operations in the long term.