Vertical integration is all about integration pre or post steps of the value chain into your business model. Vertical integration may be pursued for a variety of reasons, including strengthening the supply chain, lowering production costs, capturing upstream or downstream revenues, or expanding distribution channels. To do this, one firm purchases or expands its client joruney, which is either preceding or following it in the supply chain process. Not only can vertical integration enhance earnings from newly acquired enterprises by selling directly to consumers, but it also ensures manufacturing efficiency and reduces delivery and transportation delays.

When and how to apply Vertical Integration:

Vertical Integration involves acquiring or building capabilities for stages of the value chain that precede or follow your current position, rather than relying on external suppliers or distributors for those steps. Moving upstream (toward raw materials or components) can secure supply, reduce input costs, or capture margin previously paid to suppliers, while moving downstream (toward distribution or direct customer sale) can improve control over the customer experience and capture margin previously paid to retailers. Beyond capturing additional margin, Vertical Integration can improve coordination and manufacturing efficiency and reduce delivery and transportation delays, though it comes at the cost of increased capital investment, organizational complexity, and reduced flexibility to switch suppliers as market conditions change.

Well-known companies that use this pattern are Tesla and Zara.