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A diagram illustrating vertical integration and contrasting it with horizontal integration. In microeconomics and management, the termvertical integration describes a style ofmanagement control. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need. It is contrasted with horizontal integration. Vertical integration is one method of avoiding the hold-up problem. A monopoly produced through vertical integration is called a vertical monopoly, although it might be more appropriate to speak of this as some form of cartel. Nineteenth century steel tycoon Andrew Carnegie introduced the idea of vertical integration. This led other businesspeople to use the system to promote better financial growth and efficiency in their companies and businesses. Contents [hide] * 1 Three types * 2 Examples * 2.1 Carnegie Steel * 2.2 American Apparel * 2.3 Oil industry * 2.4 Reliance * 2.5 Motion picture industry * 3 Problems and benefits * 3.1 Static technology * 3.2 Dynamic technology * 4 Vertical expansion * 5 See also * 6 References * 7 Bibliography| -------------------------------------------------
Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers. Contrary to horizontal integration, which is a consolidation of many firms that handle the same part of the production process, vertical integration is typified by one firm engaged in different parts of production (e.g. growing raw materials, manufacturing, transporting, marketing, and/or retailing). There are three varieties: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (both upstream and downstream) vertical integration. * A company exhibits backward vertical integration when it controls subsidiaries that produce some of the inputs used in the production of its products. For example, an automobile company may own a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their final product. It was the main business approach of Ford and other car companies in the 1920s, who sought to minimize costs by centralizing the production of cars and car parts. * A company tends toward forward vertical integration when it controls distribution centers and retailers where its products are sold. * Balanced vertical integration means a firm controls all of these components, from raw materials to final delivery. The three varieties noted are only abstractions; actual firms employ a wide variety of subtle variations. Suppliers are often contractors, not legally owned subsidiaries. Still, a client may effectively control a supplier if their contract solely assures the supplier's profitability. Distribution and retail partnerships exhibit similarly wide ranges of complexity and interdependence. In relatively open capitalist contexts, pure vertical integration by explicit ownership is uncommon—and distributing ownership is commonly a strategy for distributing risk. -------------------------------------------------
One of the earliest, largest and most famous examples of vertical integration was the Carnegie Steelcompany. The company controlled not only the mills where the steel was manufactured but also the mines where the iron ore was extracted, the coal mines that supplied the coal, the ships that...