Vertical Integration

Vertical Integration

Vertical Integration Jonathan Poland

Vertical integration is a business strategy that involves a company expanding its operations to include control over the production and distribution of its products or services. This can be accomplished through a number of ways, such as acquiring or investing in companies that are involved in the production or distribution of the products, or by expanding the company’s own operations to include these activities. Vertical integration can provide a number of benefits, such as increased control over the supply chain and improved efficiency, but it can also bring challenges, such as higher costs and a greater risk of failure if the expansion is not successful.

Vertical integration can allow a company to control various aspects of its supply chain, from the production of raw materials to the distribution of finished products.

  • A car manufacturer acquires a company that produces car batteries, allowing the car manufacturer to control the production and supply of the batteries for its own vehicles.
  • A clothing retailer opens its own manufacturing facility to produce the clothing it sells in its stores, allowing the retailer to control the design, production, and distribution of its products.
  • A fast food chain opens its own farms to grow the ingredients it uses in its menu items, allowing the chain to control the quality and supply of the ingredients.

Some more examples include:

An apple farmer begins to produce apple pies to move further up the value chain.

A supplier of computer parts begins to manufacture finished goods such as mobile devices.

A manufacturer produces its own commodities and supply of parts. For example, a solar panel manufacturer that produces silicon, silicon wafers, solar cells and solar modules. This might be done to produce panels of superior quality to establish a competitive advantage.

A manufacturer may establish its own wholesale network in order to reach customers or retailers directly without a middleman.

Direct to Customer
A tea farmer cuts out multiple levels of supply chain intermediaries by selling directly to customers from a website.

A fashion manufacturer opens its own retail shops to build brand recognition and control its brand experience.

An company begins deliveries to the customer to reduce dependence on delivery companies.

A bicycle manufacturer starts a bicycle rental service.

A diamond company controls its entire supply chain including mining, logistics, manufacturing and retail.



Vertical integration can have several advantages for a firm:

Quality: Controlling the end-to-end quality of your products and services.

Cost: Reducing costs by cutting out intermediaries in the supply chain such as wholesalers.

Risk Reduction: Removing risks such as unreliable supply chain partners. For example, an ecommerce company that is able to replace a delivery partner that is often delivering things late and losing packages.

Competitive Advantage: Building competitive advantages such as a firm that achieves higher quality products and services than all competitors by controlling every detail of the supply chain. For example, a jam company that produces a higher quality jam by farming higher quality berries.


Vertical integration has several potential disadvantages for a firm:

Flexibility: Vertical integration tends to be a more rigid structure that is more difficult to change than a situation where you have partnerships in the supply chain. For example, a jam company that grows its own strawberries and raspberries may have difficulty shifting to changing consumer tastes such as a preference for pomegranate and cherries. In other words, partners can be replaced quickly but your own organization can be difficult and expensive to change.

Competitive Advantage: A firm does well to stick to areas where it has a competitive advantage. For example, an ecommerce company may be good at marketing and digital retailing but terrible at running a delivery company. In other words, they may intend to reduce costs and improve quality only to see higher costs and less quality due to their lack of capabilities in an area outside their experience.

Anti-competitive Practices: Vertical integration is often done in order to exclude competitors from an industry. For example, if you own all the parts suppliers for a particular product, it is far more difficult for a competitor to challenge you. This is a negative aspect of vertical integration for society as it can allow a firm to dominate an industry. This can result in higher prices and lower quality.

Vertical Integration vs Horizontal Integration: Vertical integration is a move to control more of your supply chain for a single product or product category. Horizontal integration is the expansion of activities at the same level of the supply chain such as a chain of coffee shops that launches a chain of restaurants. These two strategies aren’t mutually exclusive and both can be pursued at the same time.

Forward Integration vs Backward Integration: Forward integration is vertical integration that moves up the supply chain in the direction of the customer such as a manufacturer that opens retail locations. Backward integration is vertical integration that moves down the supply chain in the opposite direction of the customer such as a retailer that begins manufacturing its own products.

Learn More
Dispute Risk Jonathan Poland

Dispute Risk

Dispute risk refers to the potential for a disagreement or conflict to arise in a business context, resulting in negative…

Risk Evaluation Jonathan Poland

Risk Evaluation

Risk evaluation is the process of identifying and assessing the risks that an organization or individual may face. It is…

Managed Services Jonathan Poland

Managed Services

Managed services refer to a range of IT and business services that are outsourced to a third-party provider. These services…

Brand Objectives Jonathan Poland

Brand Objectives

Brand objectives refer to the specific goals that a brand is working towards. These goals can be both long-term end-goals,…

Physical Capital Jonathan Poland

Physical Capital

Physical capital refers to the tangible assets that are used to produce goods and services. This term is commonly used…

Product Features Jonathan Poland

Product Features

A product feature is a characteristic or aspect of a product that contributes to its overall functionality and performance. Product…

Administrative Skills Jonathan Poland

Administrative Skills

Administrative skills are abilities and personality traits that enable a person to be efficient and organized in a workplace setting.…

Sales Skills Jonathan Poland

Sales Skills

Sales skills are the abilities, knowledge, and personal characteristics that enable an individual to succeed in a sales role. These…

Program Efficiency Jonathan Poland

Program Efficiency

Program efficiency refers to the effectiveness with which a computer program uses resources such as time and memory. In general,…

Content Database

Search over 1,000 posts on topics across
business, finance, and capital markets.

What is Baseline? Jonathan Poland

What is Baseline?

A baseline is a reference point or starting point that represents the status or condition of something at a specific…

Reputational Risk Jonathan Poland

Reputational Risk

Reputational risk refers to the potential for damage to an organization’s reputation as a result of its actions or inactions.…

User Story Jonathan Poland

User Story

A user story is a concise description of a specific expectation or need that a user has for a product,…

Conformance Quality Jonathan Poland

Conformance Quality

Conformance quality refers to the production of products and delivery of services that meet specified standards or requirements. It is…

Do-It-Yourself Lobbying 150 150 Jonathan Poland

Do-It-Yourself Lobbying

Yes, it is possible to lobby the government without hiring a professional lobbyist. Lobbying, in its essence, involves advocating for…

Rebranding Jonathan Poland


Rebranding is the process of making significant changes to a company’s brand in order to alter the way it is…

Algorithmic Pricing Jonathan Poland

Algorithmic Pricing

Algorithmic pricing involves using automation to set prices dynamically based on a variety of factors, such as customer behavior, market…

Market Position Jonathan Poland

Market Position

The market position of a brand, product, or service refers to its place in a crowded market. It is the…

Investor Relations Jonathan Poland

Investor Relations

Investor relations (IR) is the process of managing the relationship between a company and its investors. This includes communicating with…