Vertical Integration

Glossary

Banking

Vertical Integration

Companies engage in vertical integration when they seek to own (through acquisition or internal builds) more than one stage in their industry value chain. Vertical integration can be backwards along the chain into upstream assets or forwards into downstream assets. Proponents of vertical integration point to cost savings in integrating two or more points in the supply chain, a guaranteed supply of inputs or a guaranteed offtaker leading to a more efficient supply chain, more focused R&D and innovation, and higher barriers to competition. Opponents point to greater costs to finance and coordinate a vertically-integrated operation (potentially greater than the costs of dealing with independent operators), potentially very costly or complicated options if a company wants to extricate itself from a vertically integrated set-up; a more complicated management challenge/lack of management know-how, and the loss of the benefits, specific skillsets and ability to keep up to date with technology or other changes in discrete specialist industry segments

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