Next video:
Loading the player...

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

There are two types of vertical integration: backward and forward. In backward vertical integration, a company such as a manufacturer owns companies that supply inputs to the business's manufacturing process. For instance, a hamburger franchise chain owns a potato farm company to ensure that it will have a constant supply of potatoes to make french fries.

In forward vertical integration, a company owns another company to get closer to the ultimate consumer in the supply chain. A manufacturer of electronic devices that buys a chain of electronics retail stores is an example of forward vertical integration.

Vertical integration usually happens because it produces efficiencies in the production process. It also happens because a company finds it can make more money by selling its products directly to consumers than by selling it to retailers. Finally, it can be done to save both time and money. Take the example of Techcon, a technology consulting company. Whenever Techcon has a customer that needs app development services, Techcon hires the relatively small app development company, Appdev, to do the work. Techcon would like to one day develop the apps in-house, but the company projects that it would take five years and cost $50 million to acquire the same expertise as Appdev. If Techcon buys Appdev for anything less than $50 million, Techcon gets an app-building division for less than it would cost to do it on its own. And by purchasing Appdev, Techcon saves five years of time as well.

Related Articles
  1. 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.
  2. Trading

    What is the Theory of Backwardation?

    Backwardation occurs when the futures price of a commodity is lower than its market price today.
  3. Small Business

    Explaining the Supply Chain

    A supply chain is the cumulative network involved in moving raw materials, components and finished products from original suppliers to end users.
  4. Insights

    Cable Veteran Leo Hindery Jr. Casts Doubt on AT&T/Time Warner Merger (T, TWX)

    The former CEO of TCI and Liberty Media joins a growing group of skeptics who warn regulatory hurdles will doom the merger between AT&T and Time Warner.
  5. Personal Finance

    Supply Chain Management Jobs Are Booming

    There has been huge growth in supply chain management, both in the number of positions open and the range of responsibilities assigned to those positions.
  6. Insights

    Leo Hindery on ATT, Time Warner

    Leo Hindery spoke with Investopedia about the future of vertical integration in the telecom industry.
  7. 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.
  8. Tech

    Can Blockchain Make Medications Cheaper and Safer?

    Blockchain-driven innovation has the potential to change the entire pharma lifecycle, from development through to delivery.
  9. Small Business

    Can You Get Rich Creating Apps?

    The good news for both kinds of apps is that people use them a whole lot. The bad news is that the majority of mobile device users download no new apps each month.
  10. Small Business

    The Most Successful App Companies

    The rapidly expanding mobile-app industry is worth billions of dollars. Its growth has led to huge success for some firms and very little for many more.
Hot Definitions
  1. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  2. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  3. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  4. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  5. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  6. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
Trading Center