Vertical integration

Vertical integration is integration along a supply chain. For example, if a retailer starts manufacturing the products it sells, it is increasing its level of vertical integration. Vertical integration may be backward or forward.

The advantages of vertical integration include the ability to secure supplies and future orders. This can also mean that the parts of the business sheltered from competition can become less efficient as they are no longer subject to the discipline of competing in an open market. Vertical integration is most often justifiable where it leads to either operational efficiencies or some other source of strategic advantage.

Businesses have increasingly moved to outsourcing many functions. This is often a significant move away from vertical integration - for example the separation of design and marketing from manufacturing that has occurred in electronics.

Businesses may also choose to integrate horizontally.