In business strategy, vertical integration occurs when a company expands into another stage of its supply chain.
A manufacturer that buys a supplier is pursuing backward integration, because it moves toward an earlier production stage. A manufacturer that opens its own retail stores is pursuing forward integration, because it moves closer to the final customer. A company can also combine both directions.
Businesses may integrate vertically to secure supplies, reduce transaction costs, protect quality, coordinate production, or gain control over distribution. The strategy can also create disadvantages, including large capital requirements, reduced flexibility, and the risk that an internally managed stage becomes less efficient than an outside specialist.
Vertical integration is different from horizontal integration. Horizontal integration combines businesses operating at the same stage, such as two competing manufacturers. Antitrust authorities may examine either strategy when it could reduce competition or disadvantage rivals.