Vertical integration is an arrangement of an enterprises’ supply chain in a way that helps to fit in different stages of the production process and supply chain into its business. A company may seek to create a competitive advantage by housing every outsourced operation. The intention of vertical integration is not only to gain market superiority but also for securing distribution channels and optimizing cost structure. In nutshell, it is used to have control over the Industry’s Value Chain.
There are two types of vertical integration: forward integration and backward integration.
Forward integration is when a business controls retailers and distributors of its products. An example of this could be an oil and gas company with gas stations.
Backward integration is a vertical integration strategy where a business seeks to control suppliers, and therefore the inputs used in the production of goods or services.