Editing Vertical integration (section)

==Three types of vertical integration==
Contrary to [[horizontal integration]], which is a consolidation of many firms that handle the same part of the production process, vertical integration is typified by one firm engaged in different parts of production (e.g., growing raw materials, manufacturing, transporting, marketing, and/or [[retailing]]). Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers. The differences depend on where the firm is placed in the order of the supply chain. There are three varieties of vertical integration: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (both upstream and downstream) vertical integration.

[[File:Types of integration.png|thumb|Distinguish between backward integration, forward integration and balanced integration]]

* Backward vertical integration: A company exhibits backward vertical integration when it controls [[subsidiaries]] that produce some of the inputs used in the production of its 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 consistent quality in their final product. It was the main business approach of [[Ford Motor Company|Ford]] and other car companies in the 1920s, who sought to use curated designs by Ford engineers, while minimizing costs by integrating the production of cars and car parts, as exemplified in the [[Ford River Rouge Complex]].<ref>{{Cite journal |last1=Langlois |first1=Richard N. |last2=Robertson |first2=Paul L. |date=1989 |title=Explaining Vertical Integration: Lessons from the American Automobile Industry |url=https://www.jstor.org/stable/2124069 |journal=The Journal of Economic History |volume=49 |issue=2 |pages=361–375 |doi=10.1017/S0022050700007993 |issn=0022-0507 |jstor=2124069 |s2cid=10438933}}</ref> This type of integration also makes the barriers to entry into an industry more difficult. The control of subsidiaries that produce the raw materials needed in the production process gives a company the power to refuse access to resources to competitors and new entrants. They have the ability to cut off the chain of supply for competing buyers and thus, strengthen their position in their respective industry.<ref name=":0">{{Cite journal |last=Etgar |first=Michael |date=1978-03-01 |title=The Effects of Forward Vertical Integration on Service Performance of a Distributive Industry |url=https://dx.doi.org/10.2307/2097868 |journal=The Journal of Industrial Economics |volume=26 |issue=3 |pages=249–255 |doi=10.2307/2097868|jstor=2097868 |url-access=subscription }}</ref>
* Forward vertical integration: A company tends toward forward vertical integration when it controls distribution centers and retailers where its products are sold. An example is a brewing company that owns and controls a number of bars or pubs. Unlike backward vertical integration, which serves to reduce costs of production, forward vertical integration allows a company to decrease its costs of distribution. This includes avoiding paying taxes for exchanges between stages in the chain of production, bypassing other price regulations, and removing the need for intermediary markets. In addition, a company has the power to refuse to support sales of competing distribution centers and retailers. Similar to backward vertical integration, this ability increases the barriers to entry into an industry.<ref name=":0" />
* Balanced vertical integration: A company demonstrates balanced vertical integration when it practices both backward vertical integration and forward vertical integration. Accomplishing this gives a company authority over the entire production and distribution process of a given product. A product that is produced in an integrated company as such exemplifies the result of a cost-efficient manufacture

[[Disintermediation]] is a form of vertical integration when [[purchasing]] departments take over the former role of wholesalers to source products.<ref>{{Cite book |last1=Lazonick |first1=William |url=https://books.google.com/books?id=NNe9VgID3XIC |title=Management Innovation: Essays in the Spirit of Alfred D. Chandler, Jr. |last2=Teece |first2=David J. |date=2012-03-08 |publisher=OUP Oxford |isbn=978-0-19-969568-3 |language=en}}</ref>

For vertical integration to succeed, managers must be able to adapt their managerial approach to compliment the changes in functional activities that their vertical shift accompanies. Managers should make sure that their firm can take advantage of existing functional knowledge through organisation, and simultaneously allow new functional knowledge to develop. However, environmental possibilities can be a factor in determining whether vertical integration is successful.<ref>Peyrefitte, J., Golden, P. A., & Brice, J. (2002). Vertical Integration and economic performance: A managerial capability framework. Management Decision, 40(3), 217–226, {{doi|10.1108/00251740210420165}}</ref>