Vertical integration is a strategy where a company takes ownership of the supply chain by acquiring or merging with a company that operates in a different stage of the production process. This involves acquiring or merging with suppliers, distributors, or retailers in the same industry. This can help drive down cost and control production quality, thus giving the company a competitive advantage.
Types of vertical integration
There are three major types of vertical integration and they all depend on what direction (whether upstream or downstream) the acquisition is taking place. Based on this, we have forward integration, backwards integration and balanced integration.
Forward Integration - this is when a company at the beginning of the supply chain acquires or merges with companies further down the supply chain. Example a movie production agency acquires a streaming platform, a farmer who decides to sell directly to the consumers at the local market, or a mining company that acquires a smelting plant.
Backwards Integration - this is when a company at the end of the supply chain acquires or merges with companies upstream. An example is when a manufacturing firm (like a steel plant) acquires a company which supplies it with raw materials (ore mining company).
Balanced Integration - this is when a company acquires other companies in both sides of the supply chain. That is, both upstream and downstream.
Although vertical integration offers some advantages such as controlling supply, avoiding market disruptors, and better pricing. It also has some downside such as high expenses, lower flexibility and focus as company tries to keep up with trends in the new sectors. Additionally, there is the issue of culture clash between the two companies.