Vertical integration

In microeconomics and management, vertical integration is an arrangement in which the supply chain of a company is owned by that company. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need. It is contrasted with horizontal integration, wherein a company produces several items which are related to one another. Vertical integration has also described management styles that bring large portions of the supply chain not only under a common ownership, but also into one corporation (as in the 1920s when the Ford River Rouge Complex began making much of its own steel rather than buying it from suppliers).

Vertical integration is one method of avoiding the hold-up problem. A monopoly produced through vertical integration is called a vertical monopoly.

Nineteenth-century steel tycoon Andrew Carnegie's example in the use of vertical integration led others to use the system to promote financial growth and efficiency in their businesses.

Vertical integration can be an important strategy, but it is notoriously difficult to implement successfully and—when it turns out to be the wrong strategy—costly to fix.

Contrary to horizontal integration, which is a consolidation of many firms that handle the same part of the production process, vertical integration is typified by one firm engaged in different parts of production (e.g., growing raw materials, manufacturing, transporting, marketing, and/or retailing). Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers.

There are three varieties: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (both upstream and downstream) vertical integration.

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