Business, Legal & 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.
Vertical integration is the merger of organisations at various stages of the manufacturing process within an industry, extending into goods distribution. This strategy is used for a variety of reasons. The acquirer, for example, can secure critical raw materials that may be in short supply. Alternatively, because it now has accurate customer demand information, the acquirer can reduce the total turnaround time of the supply chain. Furthermore, by acquiring distributors, the acquirer can gather more information about the ultimate customer. Another possibility is that the acquirer will receive all of the profits generated throughout the supply chain. Finally, the acquirer can keep its acquired businesses out of the hands of competitors, resulting in a limited form of monopoly.
When a company buys one of its suppliers, the transaction is known as backward integration, whereas buying a customer is known as forward integration. Backward integration is demonstrated by a backcountry skiing operation that purchases a helicopter rental organisation to provide lifts to its skiers. The skiing operation gains access to the helicopters required for its operations as a result of this. Forward integration can also be demonstrated by a clothing manufacturer purchasing a women’s clothing retail chain. As a result, the manufacturer gains a satisfied customer and learns more about the customers of the retail chain.
A potential issue with vertical integration is that acquired suppliers now have a guaranteed customer and thus have less incentive to engage in cost cutting and product development, which can eventually reduce the combined company’s overall competitiveness. This problem can be alleviated by allowing company divisions to purchase from outside suppliers rather than other subsidiaries, which increases the level of competition to which the subsidiaries are exposed.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Vertical Integration are sourced/syndicated and enhanced from:
This glossary post was last updated: 13th April, 2022 | 0 Views.