Vertical integration: taking control of your supply chain

The global supply chain faces ongoing challenges. Recent disruptions have impacted many businesses, with rising costs being a primary concern for 84.6% of them due to these interruptions. If your business is experiencing unpredictable logistics or increasing overhead costs, know that many others are facing similar difficulties.

Streamlining your supply chain can improve efficiency, reduce costs, and give your business a competitive edge. One way to achieve this is through vertical integration, where your company takes control of multiple stages of the supply chain—from sourcing raw materials to delivering finished products.

Vertical integration can help your business cut inefficiencies, improve quality control, and gain more oversight, but it’s not without challenges. Success requires a clear strategy, proper resource allocation, and alignment with your business goals.

In this article, you’ll learn how vertical integration works, the steps to implement it, and how to decide if this strategy is the right move for your business.

Jump to:

• What vertical integration means for your business
• Types of vertical integration
• Vertical vs. horizontal integration
• Pros and cons of vertical integration
• 8 examples of successful vertical integrations
• When should a business consider vertical integration?
• When is it a bad idea to vertically integrate?
• Is vertical integration profitable?
• The bottom line on vertical integration
• Vertical integration FAQ

What vertical integration means for your business

Vertical integration allows your business to gain control over different stages of your supply chain. Enhancing efficiency and reducing dependency on external suppliers or distributors. 

By moving beyond simple partnerships, vertical integration creates a more unified and responsive operation. It offers significant advantages in reducing costs, improving quality control, and maintaining better oversight across the entire supply chain. 

This approach can also help mitigate risk related to supply chain disruptions, as you’re not reliant on external entities to perform critical functions. 

For example, forward integration for a retailer could involve acquiring a delivery service to streamline customer fulfillment. For the same retailer, backward integration might mean managing raw material sourcing by merging with suppliers to oversee production directly.

You can also combine both approaches with balanced integration or fully internalize your supply chain, bringing the entire supply chain in-house.

Types of vertical integration

Vertical integration comes in various forms, depending on how you manage your supply chain. Here’s a breakdown of the primary types of vertical integration.

Complete vertical integration

Complete vertical integration involves owning and controlling every stage of your supply chain, from sourcing raw materials to delivering the finished product to your customers. This strategy gives you maximum oversight and minimizes dependency on third-party suppliers or distributors. 

By managing every step, you can ensure consistent quality, reduce costs by eliminating intermediaries, and safeguard proprietary processes. However, this level of control requires significant capital investment and operational expertise across multiple business functions.

Companies considering complete vertical integration must be prepared to manage diverse operations and navigate potential risks, such as market fluctuations or capacity challenges in newly acquired areas. 

Complete integration can streamline workflows and improve margins for businesses with complex supply chains, but it’s not a one-size-fits-all solution. Before committing to this intensive approach, assess your scalability, resources, and long-term vision. 

Forward vertical integration

Forward vertical integration focuses on taking control of distribution or customer-facing processes, like retail, marketing, or service delivery. This approach is ideal if your goal is to directly connect with your customers, improve brand experience, and capture more value from the final stages of your supply chain.

For instance, a manufacturer might open its own retail stores to sell products directly, bypassing third-party retailers. This strategy helps you retain more profit, control pricing, and gather customer data to refine your offerings.

However, entering the retail or distribution space comes with challenges, including higher operating costs and the need for specialized expertise in managing customer relationships.

Companies pursuing forward integration should ensure they have the resources and infrastructure to effectively manage these additional functions without compromising their core operations. 

Backward vertical integration

Backward vertical integration involves gaining control over your supply chain’s upstream stages, such as sourcing raw materials or producing components. By owning these processes, you can strengthen your supply chain strategy, reduce dependency on external suppliers, and potentially lower production costs. 

For example, a food manufacturer might acquire a farm to control ingredient quality and availability, or an electronics company might invest in a component supply to mitigate risks of shortages. Backward integration provides better cost control and ensures consistency in supply, but it also requires capital investment and expertise in areas outside your core business.

If supplier relationships or raw material costs are a vulnerability in your operations, backward integration can offer long-term stability. However, careful analysis is needed to determine if the benefits outweigh the risks of diversification. 

Disintermediation

Disintermediation is a unique form of vertical integration where you eliminate intermediaries in your supply chain without fully owning every stage. Instead of acquiring suppliers or distributors, you cut out go-betweens and work directly with customers or vendors. 

This strategy often involves leveraging technology, such as e-commerce platforms or direct-to-consumer sales channels, to create a more streamlined connection between your business and its stakeholders. For example, a brand might sell directly to consumers online, bypassing traditional retail chains.

While disintermediation reduces reliance on third parties and increases profit margins, it also requires robust digital infrastructure, logistical capabilities, and marketing efforts. You take on more responsibility for customer experience and operations but gain greater flexibility and control in return.

Whether you aim to reduce costs or enhance your market presence, disintermediation can effectively modernize your supply chain without full-scale integration. 

Vertical vs. horizontal integration

Vertical and horizontal integration strategies both help expand a company’s reach, but they are different approaches to scaling.

• Vertical integration involves a company acquiring or merging with other businesses at different stages of the supply chain, either upstream (backward) or downstream (forward).
• Horizontal Integration refers to merging with companies operating at the same stage of the supply chain, often with the goal of eliminating competition or expanding market share. 

Here’s a breakdown of each:

Vertical Integration

Vertical integration streamlines the supply chain by bringing multiple stages under one roof.

• Upstream (Backward Integration): Acquiring suppliers or raw materials
• Downstream (Forward Integration): Acquiring distributors or retailers

Horizontal integration

Horizontal integration occurs when a company merges with others that operate at the same supply chain level. This strategy aims to expand market share by broadening product offerings or reducing competition.

• Market expansion: Acquiring companies with complementary or similar products
• Eliminating competition: Merging with direct competitors

Pros and cons of vertical integration

Vertical integration offers many advantages, primarily control and reduced disruption across your supply chain. By bringing more components in-house, you gain greater visibility and communication, making it easier to manage all production stages. 

This control helps mitigate risks like supply shortages and shipment delays, allowing you to quickly adapt to market shifts or unexpected issues. Streamlining the entire process from raw materials to manufacturing to final order delivery results in faster time to market and a more self-sufficient operation. 

Tools with multi-dimensional reporting can further enhance decision-making by providing deeper insights into performance across integrated supply chain stages.

Vertical integration drives cost savings, improves product quality, and enhances your ability to balance supply with demand. This creates a competitive edge and boosts long-term customer value. 

There are distinct advantages to vertical integration, but it also comes with challenges. Here’s a detailed look at the pros and cons: 

Pros:

• Greater control of the supply chain: Minimize dependency on third parties and stabilize operations. 
• Lower costs: Cut out intermediaries and directly manage production or distribution expenses.
• Improved quality management: Direct oversight ensures consistency in production and delivery.
• Supply and distribution security: Safeguard against disruptions or shortages in critical inputs or market access.

Cons:

• Significant upfront investment: Expanding into new supply chain stages requires substantial capital. 
• Decreased operational flexibility: Committing to in-house processes limits the ability to pivot quickly.
• Increased complexity: Managing multiple stages of the supply chain adds layers of operational challenges.
• Risk of diluted focus: Diverting resources to noncore activities may impact overall performance. 

8 examples of successful vertical integrations

Several companies have successfully applied vertical integration strategies to streamline operations and strengthen their market positions. Let’s explore some examples across different industries.

Cregie Steel

Cregie Steel, a steel manufacturer, has built a vertically integrated model by consolidating the steel production process. 

The company controls everything from mining raw materials to processing and fabricating the steel. This allows Cregie Steel to ensure product quality, reduce supply chain disruptions, and adapt quickly to market demands, making it a key player in the global steel industry.

Luxottica

Luxottica, an Italian eyewear giant, began as a small optical component manufacturer before vertically integrating to produce ready-to-wear frames. The company expanded its reach by acquiring independent distributors and entering licensing agreements with luxury brands like Giorgio Armani and Chanel.

By acquiring retail chains such as Oakley and Sunglass Hut, Luxottica has created a fully integrated model that spans design, manufacturing, distribution, and retail. 

ExxonMobil

ExxonMobil is a leading example of vertical integration in the energy sector. The company operates across all stages of the oil and gas supply chain, from extraction to retail.

ExxonMobil’s upstream division focuses on the exploration and production of oil and natural gas, while its downstream division manages refining, transportation, and the sale of finished petroleum products, including gasoline and jet fuel. This level of integration enables the company to respond swiftly to market shifts and maintain a competitive edge in the global energy market.

When should a business consider vertical integration?

Vertical integration can offer significant advantages, but it’s not right for every business. Before deciding to take control of your entire supply chain, evaluate whether it will truly provide the expected benefits.

Consider vertical integration if you want:

• Supply Chain Control: In industries with limited suppliers, acquiring key components can give you a competitive advantage.
• Geographic Expansion: For businesses expanding into new regions, integrating with local manufacturers or distributors can streamline operations
• Quality Assurance: Luxury or premium brands benefit from backward integration to protect proprietary processes and ensure consistent, high-quality products.
• Cost Efficiency: If you serve a cost-conscious customer base, vertical integration can reduce production and operational costs, improving margins on lower-profit items.
• Direct-to-Customer: Acquiring retail channels allows you to bypass intermediaries, boosting profit margins and improving customer relationships.

Ultimately, vertical integration works best for companies with a clear view of their entire supply chain and the capacity to manage it effectively. Enterprise Resource Planning (ERP) software, like the Intuit Enterprise Suite, can provide the visibility and tools needed to evaluate feasibility, streamline processes, and manage the complexities of integration.

Leverage the right technology, so you can adapt to operational changes and position your business for long-term success. 

How to know if vertical integration isn’t a good fit

Vertical integration can be costly and resource-heavy, often making it a risky strategy for businesses that lack the scale or infrastructure to support it. Expanding into new supply chain areas can strain resources and shift focus away from your core business, potentially jeopardizing its success. 

Consider avoiding vertical integration if:

• Lack of resources: you lack the infrastructure or capital to manage the expansion
• Strain on core business: integrating new operations may distract you from your core business competencies
• Increased complexity: aligning new operations with existing processes could create unnecessary complexity
• Inability to achieve economies of scale: if you lack the volume to benefit from economies of scale, outsourcing may be a more cost-effective approach
• Unpredictable market conditions: ongoing investment and commitment may become challenging if market conditions change unpredictably

In these cases, it might be better to rely on outsourcing or other strategies to maintain flexibility and avoid excessive risk.

Is vertical integration profitable?

Vertical integration can be profitable, but it depends on the company’s ability to efficiently manage additional operational complexity. By eliminating intermediaries and reducing reliance on external suppliers, businesses can lower costs and capture higher margins.

However, success requires a significant upfront investment in infrastructure, resources, and management capabilities. Companies that can streamline their processes, maintain quality control, and scale operations effectively tend to see stronger profitability in the long term.

Careful planning and strategic alignment are key to getting the full financial benefits of vertical integration.

The bottom line on vertical integration

Vertical integration can be a powerful growth strategy, offering increased control over your supply chain and reducing reliance on third parties. It also has the potential to streamline operations and enhance competitive advantage.

However, like any merger or acquisition, it demands rigorous planning and seamless execution to deliver results. Success hinges on having a clear strategy and tools to navigate the complexities of integration.

Leveraging ERP software that provides supply chain visibility can help you evaluate feasibility, identify opportunities, and adapt smoothly to operational changes, positioning your business for long-term success.