Vertical integration

Vertical integration is an economic theory describing a style of ownership.Vertically integrated companies are united through a hierarchy and share a common owner. Usually each member of the heirarchy produces a different product, and the products combine to satisfy a common need.

There are three varieties of this : backward vertical integration, forward vertical integration, and balanced vertical integration. In backward vertical integration, the company sets up subsidiaries that produce some of the inputs used in the production of it's 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. In forward vertical integration, the company sets up subsidiaries that distribute or market products to customers or use the products themselves. An example of this is a movie studio that also owns a chain of theaters. In balanced vertical integration, the company sets up subsidiaries that both supply them with inputs and distribute their outputs.

See also zaibatsu for the Japanese approach to vertical integration.

See also Horizontal integration

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