Vertical Integration

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What is '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.

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. Horizontal Integration

    The acquisition of additional business activities that are at ...
  5. Vertical Market

    A group of companies that serve each other's specialized needs ...
  6. Economic Integration

    An economic arrangement between different regions marked by the ...
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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. 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 >>
  4. 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 >>
  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 >>
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