Vertical integration

Definition

Vertical integration is a strategy where a company expands its operations into different stages of production within the same industry. This can involve acquiring suppliers (backward integration) or distributors (forward integration) to control more of the supply chain.

5 Must Know Facts For Your Next Test

1. Vertical integration can help companies manage commodity price risk by securing supply chains and reducing dependency on external suppliers.
2. It can lead to cost savings through economies of scale and improved coordination across different stages of production.
3. Vertical integration may provide competitive advantages by controlling critical inputs or distribution channels, which can be especially important in volatile markets.
4. The strategy requires significant capital investment and may increase operational complexity, making risk management crucial for financial managers.
5. Financial managers must evaluate the potential risks and rewards of vertical integration, considering market conditions, cost structures, and the company's overall strategic goals.

Review Questions

• How does vertical integration help in managing commodity price risk?
• What are some potential benefits and drawbacks of vertical integration for a company?
• Why is evaluating market conditions important when considering vertical integration?

Related terms

Horizontal Integration: A strategy where a company acquires or merges with competitors to increase market share.

Supply Chain Management: The oversight and management of the flow of goods from suppliers to consumers.

Economies of Scale: Cost advantages that companies obtain due to size, output, or scale of operation.