Vertical Integration

See Also:
Horizontal Integration
Business Cycle
Business Segment Reporting
Mergers and Acquisitions (M&A)
Business Intelligence and Finance

Vertical Integration

What does vertical integration mean? Vertical integration is the process or a company’s domination of every aspect of the production line or process for a particular product. This includes the extraction of raw materials to manufacturing, and the sale of the finished product.

Vertical Integration Explained

Vertical Integration was first used in business practice when Andrew Carnegie used this practice to dominate the steel market with his company Carnegie Steel. It allowed him to cut prices and exhuberate his dominance in the market. Currently, this is considered a vertical monopoly and is illegal as an entity.
There are currently three types of vertical integration in the marketplace. The first known as backward integration means that a company possesses control over the first parts of the production process. These can range from raw material possession or production to the manufacturing process. The second form of vertical integration is forward integration where a company maintains control over the forward parts of the production process like distribution and selling of the finished goods. The last of the types of vertical integration is balanced integration. This type of integration contains all parts of the production process, and is also referred to as a vertical monopoly.

Vertical Integration Example

Chris owns a wooden furniture company which is responsible for the manufacture of wooden furniture products to several retailers around the United States. Recently Chris’s company has undergone some strains on its profit margins from the timber companies that supply the company to the retailers who are trying to cut their own costs. Chris has thus decided to vertically integrate to try and enhance his profit margins because if he doesn’t he sees his company going out of business. Thus Chris buys one of the larger retailers so that he can immediately use the large distribution and selling centers around the nation. By doing this Chris can charge a higher price because he is now selling directly to the customer. He can also see a reduced cost for his distribution points.
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