What is Vertical Integration? Description
Vertical Integration is an approach for increasing or decreasing the level
of control which a firm has over its inputs and distribution of outputs.
Vertical integration is the extent to which an organization controls its
inputs and the distribution of its products and services. There are two sorts
of vertical integration: backward integration and forward integration. A firm’s
control of its inputs or supplies is known as: backward integration.
A firm’s control of its distribution is known as: forward integration.
Vertical integration is best understood by applying
Michael Porter’s Value Chain model.
Vertical integration refers to the degree of integration between a firm’s
value chain and the value chains of its suppliers and distributors.
Full vertical integration occurs when a firm incorporates the valuechain
of a supplier and/or that of a distribution channel into its own value chain.
This generally happens either by a firm’s acquiring a supplier and/or a distributor
or by a firm’s expanding its operations. Expanding operations means to perform
activities traditionally undertaken by suppliers or distributors. A lower
degree of vertical integration is commonly known as: Supply Chain Optimization
or also as: Supply Chain Planning. This occurs when logistical information
is exchanged between a firm and its suppliers and customers. See:
Vendor Managed Inventory.
An illustration of vertical integration may be found in the airline
industry. By performing the traditional role of travel agents, Airlines
have achieved forward integration. Likewise, by performing the role of suppliers
such as aircraft maintenance and inflight catering, airlines have backwards
integrated. Similarly, oil refining companies have traditionally owned
their oil distribution channels such as gas stations. Sometimes they moved
into oil exploration and exploitation..
Origin of Vertical Integration. History
The strategic reasons for opting for a vertical integration strategy
have changed over the years. During the 19th century, firms used vertical
integration to achieve economies of scale. During the middle of the 20th century,
vertical integration was used to assure a steady supply of vital inputs. In
some cases, the theory of transaction cost economics was applied to backward
integration or forward integration, as a means to total cost reduction. That
is, it was cheaper for a firm to perform the role of suppliers and distributors
than to spend time and money to interact with such parties.
Subsequently, in the late 20th century, competition intensified in most industries.
Corporate restructuring resulted in vertical disintegration by reducing the
levels of vertical integration in large corporations.
Vertical disintegration is facilitated by the widespread use of information
and telecommunications technologies, which support lower transaction costs
between market participants. As lower transaction costs can be achieved using
information and communication technologies, rather than by vertically integrating,
firms start to vertically disintegrate. This effect is commonly known as “Coase’s
Law” (in recognition of Ronald Coase's Nobel price) or the “Law of
Diminishing Firms”. This law states that when the transaction costs are
decreasing, the size of the firm will also decrease.
Usage of Vertical Integration. Applications
Decisions on vertical integration are usually made in the following contexts:
 In the strategy development process, vertical integration may
be considered as a strategic choice. For example if suppliers are very powerful,
a solution to that threat is to buy a number of them up.
 When you are analyzing industry dynamics, using Porter’s Five
Forces model, vertical integration is an action to decrease the bargaining
power of suppliers and customers. Compare:
Kraljic Model.
 Vertical integration may be a path for reducing transaction costs.
Steps in Vertical Integration. Process
When you are deciding whether to vertically integrate, and to what extent,
you should consider the following issues:
 Are there economies of scope, which would make it cheaper for
a firm to control inputs and outputs?
 Are there any market external factors, which would make it more
efficient for a firm to control inputs and outputs?
 Is there a need to pursue monopoly power?
Strengths of Vertical Integration. Benefits
 Economies of scale.
 Economies of scope.
 Cost reduction.
 Competitiveness.
 Reduce threat from powerful suppliers and/or customers.
 Higher degree of control over the entire value chain.
Limitations of Vertical Integration. Disadvantages
 There is no such thing as a completely integrated or a completely nonintegrated
firm. Thus the issue is not a choice between these two polar alternatives.
Rather, it is a matter of selecting the optimal degree of vertical integration.
 The degree of vertical integration can hardly be determined via quantitative
means.
 Whilst Vertical Integration may solve one headache, the firm may well
be acquiring a bunch of others. Compare
Core Competence.
 Load and capacity balancing between the old and the new activities may
be hard to achieve.
Assumptions of Vertical Integration. Conditions
 A firm has to have the competences to undertake an expanded role in
the supply chain.
Book: Kathryn Rudie
Harrigan  Vertical Integration, Outsourcing, and Corporate Strategy 
Book: Roger Blair
and David Kaserman  Law and Economics of Vertical Integration and Control


Captive Distribution
What is the difference between Vertical Distribution (VI) and Captive Distribution (CD)? What is the single most important factor in deciding to adopt a captive strategy? Product? Market conditions?...





Flexible Integration Strategy
We can approach both horizontal and vertical integration strategy also from the viewpoint of required flexibility.
Consider that our business climate and our negotiating capabilities keep changing all the time. Consequently, we have to keep chan...





Orthogonal Integration
Besides horizontal and vertical integration strategies, a third one is orthogonal integration. This would involve a third dimension, in which orthogonal (Editor: ~independent, nonoverlapping) partnerships are arranged with both one's competitors and...





(Legal) Limits to Vertical Integration
 I would like to mention that backwards vertical integration (take control of supplier) is not legal if you gain control over competitors who source from the same supplier.
 The same holds for forward integration if you dominate ...





Integration Strategy
Here's my summary of integration strategies:
1. VERTICAL INTEGRATION:
1A. Forward (Vertical) integration:
= Seeking ownership or increased control over distributors or retailers.
 



Alternatives of Vertical Integration?
Hi, given those mentioned limitations, what are the alternative options, other than going for vertical integration? Thanks for your inputs......





Advantages of Vertical Integration
Are there besides the benefits mentioned above still more advantages of vertical integration? Why?...





Disadvantages of Vertical Integration
Are there besides the limitations mentioned above still more disadvantages of vertical integration? Why?...





Examples and Case Studies of Vertical Integration
Who can share and explain an example of vertical integration? Thanks......





Vertical Integration Cum Diversification
If vertical integration is associated with necessary unrelated diversification, then how to analyze the "fit" and benefits. For ex. An oil refiner & mktg company forays into ethanol business as a part of vertical integration but lands up producing su...





Symbiotic Resource Interdependencies
What is the relationship between vertical integration and the reduction of symbiotic resource interdependencies in the retail industry?...





Quasi Vertical Integration
Hi, I would like to know, is quasivertical integration the same as vertical integration? If there is a difference, what is it?...







Vertical Integration Special Interest Group




Vertical Integration Education & Events




Two More Forms of Strategic Integration Strategy, Corporate Integration






Virtual Integration Dell’s Direct Model Case






Vertically Integrated Enterprise Identifying Potential Synergy Areas








The Make or Buy Decision
Vertical Integration





Vertical Integration and Horizontal Integration
Difference Between Vertical Integration and Horizontal Integration





Trans. Costs & Techn. Adoption
VMI, Insurance Industry





Strategic Transfer Pricing, Absorption Costing and Vertical Integration
Transfer Pricing, Absorption Costing, Vertical Integration





News
Forward Vertical Integration





News
Backward Vertical Integration





Videos
Forward Vertical Integration





Videos
Backward Vertical Integration





Presentations
Forward Vertical Integration





Presentations
Backward Vertical Integration





More
Forward Vertical Integration





More
Backward Vertical Integration






Compare with Vertical Integration:
Horizontal Integration
 Value Chain 
Porter Five Forces 
Core Competence 
Outsourcing 
Insourcing 
Coopetition 
Vendor Managed Inventory
 Supply Chain Planning
Return to Management Hub: Finance & Investing  Strategy
 Supply Chain & Quality
More Management Methods, Models and Theory



Sponsor



Special Interest Group Leader



All you need to know about management



Management Smart Card






