Vertical Integration

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DEFINITION of 'Vertical Integration'

When a company expands its business into areas that are at different points 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 efficiency by decreasing transportation expenses and reducing turnaround time, among other advantages. However, sometimes it is more effective for a company to rely on the expertise and economies of scale of other vendors rather than be vertically integrated.

BREAKING DOWN 'Vertical Integration'

Backward and forward integration are types of vertical integration. A company that expands backward on the production path has backward integration, while a company that expands forward on the production path is forward integrated.

Examples of vertical integration include:

- A mortgage company that both originates and services mortgages, meaning that it both lends money to homebuyers and collects their monthly payments.

- A solar power company that produces photovoltaic products and also manufacturers the cells, wafers and modules to create those products would be considered vertically integrated.

- The merger of Live Nation and Ticketmaster created a vertically integrated entertainment company that manages and represents artists, produces shows and sells event tickets.

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RELATED FAQS
  1. Why should management teams focus more on horizontal integration?

    Management teams should focus more on horizontal integrations because they allow for economies of scale, economies of scope, ... Read Full Answer >>
  2. What proportion of the chemicals sector is comprised of integrated companies with ...

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  3. To what extent do changing input prices affect the profitability of the chemicals ...

    The chemicals sector is strongly influenced by raw materials and commodities prices. Price volatility is a significant enough ... Read Full Answer >>
  4. What caused the American Industrial Revolution?

    The initial vestiges of industrialization appeared in the United States in 1790, when Samuel Slater opened a British-style ... Read Full Answer >>
  5. What is the best reason to pursue a backward integration?

    Saving money on costs and improving efficiency are two good reasons to pursue backward integration. Backward integration ... Read Full Answer >>
  6. Is backward integration the same thing as vertical integration?

    Backward integration is a type of vertical integration, but they are not the same. Vertical integration is the process of ... Read Full Answer >>
  7. What are the disadvantages of backward integration for a mid-sized business seeking ...

    Backward integration allows businesses to obtain control over suppliers and improve supply chain efficiency. Businesses merge ... Read Full Answer >>
  8. When is outsourcing a bad alternative to vertical integration?

    Outsourcing is a bad alternative to vertical integration when there are capacity balancing issues. For example, if a business ... Read Full Answer >>
  9. When is outsourcing preferable to vertical integration?

    Ideally, vertical integration is the preferred strategy for business growth and development, but in reality, the process ... Read Full Answer >>
  10. Can Internet companies be vertically integrated?

    Internet companies can be vertically integrated, just as traditional businesses vertically integrate to consolidate costs ... Read Full Answer >>
  11. What are the tax incentives or disincentives to vertical integration?

    In certain jurisdictions, such as the countries that are members of the European Union, there is a system of taxation called ... Read Full Answer >>
  12. When does it makes sense for a company to pursue vertical integration?

    Vertical integration makes sense as a strategy, as it allows a company to reduce costs across various parts of production, ... Read Full Answer >>
  13. What are the major costs to a firm when pursuing vertical integration?

    In the initial stages of a vertical integration, there are inevitable legal and administrative costs as the two companies ... Read Full Answer >>
  14. When does vertical integration reduce transaction costs?

    As a business technique, vertical integration first emerged in the 19th century. It was a term coined by Andrew Carnegie ... Read Full Answer >>
  15. What are the legal barriers to vertical integration?

    Vertical integration through internal expansion is not vulnerable to legal challenges. However, if the vertical integration ... Read Full Answer >>
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