Vertical Integration Concept
Vertical integration refers to the control level that a certain company has over its production factors or over the distribution or use of the products and services produced by it. Vertical integration is said to be complete when the company has total control over its production factors or over its distribution or use of the products and services produced by it. Vertical integration can, so, be understood with the company’s progression in its value chain.
Vertical integration can assume two types:
- Upstream vertical integration: when the control progression is towards the productive chain rear, this is, in the direction of the sector that produces the production factors used by the company;
- Downstream vertical integration: when the control progression is towards the productive chain front, this is, in the direction of the sector that controls the distribution or the transformation of the products and services produced by the company.
There are several advantages that can come from the adoption of a vertical integration strategy, among which:
- Bigger control over quality, delivery deadlines and rhythm, etc. of the production factors;
- Bigger control over the distribution of products and services produced and over the associated after-sales services;
- Increase of the negotiable power over the suppliers or over the clients depending on whether the integration processes to upstream or downstream;
- Benefits associated to scale economies or costs savings with the inputs supplies or with the outputs distribution.