Loading the player...

What is 'Vertical Integration'

Vertical integration is a strategy where a company expands its business operations into different steps on the same production path, such as when a manufacturer owns its supplier and/or distributor. Vertical integration can help companies reduce costs and improve efficiencies by decreasing transportation expenses and reducing turnaround time, among other advantages. However, sometimes it is more effective for a company to rely on the established expertise and economies of scale of other vendors rather than trying to become vertically integrated.

BREAKING DOWN 'Vertical Integration'

Specifically, vertical integration occurs when a company assumes control over several production or distribution steps involved in the creation of its product or service. Vertical integration can be carried out in two ways: backward integration and forward integration. A company that expands backward on the production path into manufacturing is assuming backward integration, while a company that expands forward on the production path into distribution is conducting forward integration.

General Examples of Vertical Integration

Companies from many different industries and sectors choose to vertically integrate. A mortgage company that originates and services mortgages is a vertically integrated loan-servicing firm. The company lends money to homebuyers and collects their monthly payments, rather than specializing in one service or the other.

A solar power company that produces photovoltaic products and also manufactures the cells used to create those products is another example of a vertically integrated business. In this case, the company moved along the supply chain to assume the manufacturing duties, conducting a backward integration.

The merger of Live Nation and Ticketmaster created a vertically integrated entertainment company that manages and represents artists, produces shows and sells event tickets. This type of integration is forward from the perspective of Ticketmaster and backward from the perspective of Live Nation.

Apple as the Stalwart of Vertical Integration

Apple Inc. is one of the best-known companies for perfecting the art of vertical integration. The company manufactures its custom A-series chips for its iPhones and iPads. It also manufactures its custom touch ID fingerprint sensor. Apple opened up a laboratory in Taiwan for developing LCD and OLED screen technologies in 2015. It also paid $18.2 million for a 70,000-square-foot manufacturing facility in North San Jose in 2015. These investments allow Apple to move along the supply chain in a backward integration, giving it flexibility and freedom in its manufacturing capabilities.

The company has also integrated forward as much as backward. The Apple retail model, one where the company's products are almost exclusively sold at company-owned locations, excluding Best Buy and other carefully selected retailers, allows the business to control its distribution and sale to the end consumer.

RELATED TERMS
  1. Backward Integration

    A form of vertical integration that involves the purchase of ...
  2. Vertical Merger

    A merger between two companies producing different goods or services ...
  3. Forward Integration

    A business strategy that involves a form of vertical integration ...
  4. Vertical Market

    A group of companies that serve each other's specialized needs ...
  5. Vertical Well

    A well that is not turned horizontally at depth, and which allows ...
  6. Vertical Line Charting

    A technique used by technical traders and market technicians ...
Related Articles
  1. Investing

    What's a Vertical Merger?

    A vertical merger occurs when two companies that produce goods or services for the same finished product merge operations.
  2. Small Business

    Vertical Integration

    Vertical integration occurs when a company buys and controls other businesses along its supply chain.
  3. Small Business

    What is Backward Integration?

    What is backward integration, and how can it affect industries?
  4. Small Business

    Understanding Forward Integration

    Forward integration happens when a business takes over functions that were originally performed by its partners farther down the supply chain.
  5. Managing Wealth

    Data Integrity Analyst: Job Description & Average Salary

    Learn about the average salary of a data integrity analyst and the required skills, education and previous experience needed to fill this role.
  6. Trading

    What is the Theory of Backwardation?

    Backwardation occurs when the futures price of a commodity is lower than its market price today.
  7. Investing

    Understanding Vertical Analysis

    In vertical analysis, each line item on a company’s financial statements is presented as a percentage of a larger number.
  8. Insights

    Understanding Horizontal Integration

    Horizontal integration is the acquisition or internal creation of related businesses to a company’s current business focus.
  9. Personal Finance

    Common Interview Questions for Data Integrity Analysts

    Prepare for a data integrity analyst job interview by identifying some of the key questions commonly asked and developing winning responses.
  10. Investing

    Explaining Economic Integration

    Economic integration reduces or eliminates trade barriers among nations, and coordinates monetary and fiscal policies.
RELATED FAQS
  1. Is backward integration the same thing as vertical integration?

    Learn if there are any differences between backward integration and vertical integration. Learn where on the production line ... Read Answer >>
  2. How do I calculate the Macaulay duration of a zero-coupon bond in Excel?

    Understand the difference between a horizontal integration and a vertical integration. Learn when a company would want to ... Read Answer >>
  3. When does it makes sense for a company to pursue vertical integration?

    Discover how vertical integration allows firms to take more control over production costs, the quality of its products and ... Read Answer >>
  4. What are the major costs to a firm when pursuing vertical integration?

    Following a vertical integration, there are initial setup costs and additional administrative costs as well as other costly ... Read Answer >>
  5. What is the best reason to pursue a backward integration?

    Learn if backward integration is a good or bad move for a business. Learn what backward integration does for a business's ... Read Answer >>
  6. When does vertical integration reduce transaction costs?

    Trading is not just based on supply and demand, but negotiations between companies. Vertical integration can eliminate this ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center