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.

INVESTOPEDIA EXPLAINS '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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  3. Backward Integration

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RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. Can Internet companies be vertically integrated?

    Internet companies can be vertically integrated, just as traditional businesses vertically integrate to consolidate costs ... Read Full Answer >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
  7. 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 >>
  8. 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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