Many times, we think about Vertical Integrations as relationships where one affects the other in a hierarchy. However, the real definition of a Vertical Integration in Marketing is “the degree to which a firm owns its upstream suppliers and its downstream buyers”, meaning, it is when a business owns companies that feed into their final product or to the distribution/sales of it.
There are three types of Vertical Integration:
- Backward or Upstream: a company owns subsidiaries that produce inputs in the production of the final product. For example: Ford owns a tire company that is used in the production of their Ford car production line.
- Forward: a company owns the subsidiaries that market the product. The perfect example of this is Apple owning Apple Stores.
- Balanced: a company owns subsidiaries that supply them with inputs and market their product. For example, Discovery Channel owns production companies to supply to them content, but they also have a subdivision that sells their content created to a 3rd party vendor.
The benefits to Vertical Integration are many. Reduced transportation costs, capturing profits from the beginning to the end of the supply chain and creating entry barriers to competitors are only a few of them. It should be the goal for each company to sustain themselves as much as possible to increase all of the benefits mentioned before.