UK Accounting Glossary
The combination of 2 or more companies at differing stages in the value chain.
For example: a manufacturer may purchases one of it’s suppliers or an organisation involved in distributing it’s products.
Vertical disintegration is said to occur when a company withdraws from a stage in the value chain, usually because it decides it would be more cost-effective to hire another company to carry out said activities.
In strategic management and microeconomics, vertical integration is the consolidation of upstream (suppliers) and/or downstream (customers) components of the value chain into a common ownership structure. Costs, market differentiation, and other business issues are impacted by the extent of vertical integration. For instance, vertical integration is a solution to what economists call the hold-up problem, a situation in which it would be efficient for two firms to cooperate, but the firms do not because of differences in bargaining power. Major players in the oil industry have extensive vertical integration. Oil giants including BP and Shell conduct exploration and crude recovery, transport and refining, and retail distribution and sale of fuel. Vertical integration focused on expanding downstream activity is called forward integration. Vertical integration focused on expanding upstream activity is called backward integration. Vertical integration should be distinguished from horizontal integration.
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This glossary post was last updated: 5th May 2019.