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. Personal Finance

    Why You Should Consider A Career In Supply Chain Management

    Supply chain managers ensure that increasingly global companies can coordinate distant sources of materials, labor, and manufacturing to successfully bring products to market.
  2. Insights

    Leo Hindery on ATT, Time Warner

    Leo Hindery spoke with Investopedia about the future of vertical integration in the telecom industry.
  3. 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.
  4. 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.
  5. Investing

    What is a Forward Contract?

    A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
  6. Small Business

    How To Start A Successful App Business

    How to start a business creating apps, how other profitable business have done it, and the most important things to consider.
  7. Personal Finance

    Cyber Monday: Is This App Safe to Shop In?

    There’s been a surge of phony retail and product apps appearing in Apple’s App Store recently. Here’s how to know if an app is safe to shop in.
  8. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller.
  9. 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.
  10. Insights

    What Are Economies Of Scale?

    Is bigger always better? Read up on the important and often misunderstood concept of economies of scale.
Trading Center