Although originally presented as the two methods of integration as leadership tools, I found several sources reporting that there are actually three varieties: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (both upstream and downstream) vertical integration. Lateral integration is an alternative term for horizontal integration, defining an enterprise pursuing a diversification strategy which is in different production stages and industries under a uniform management in the economy. The term vertical integration describes a style of ownership and control.
The degree to which a firm owns its upstream suppliers and its downstream buyers determines how vertically integrated it is. Vertically integrated companies are united through a hierarchy and share a common owner. Usually each member of the hierarchy produces a different product or service, and the products combine to satisfy a common need. It is contrasted with horizontal integration.
Vertical integration is one method of avoiding the hold-up problem. A monopoly produced through vertical integration is called a vertical monopoly, although it might be more appropriate to speak of this as some form of cartel (venturenavigator). Vertical integration consist of facilitating contact and communication with headquarters so that it will be aware of the interests of the overall corporation and the role of each subsidiary.
An example that is given in the text includes the temporary assignment of expatriates, or subsidiary employees, to positions at headquarters, corporate training programs, and providing subsidiary managers with a mentor at headquarters. Vertical integration as in microeconomics and management, vertical integration is observed as a style of leadership and control. Vertical integration enables a company to reduce uncertainties related to supply chain. When a car manufacturer integrates with a steel manufacturer, the prices and delivery of steel is more certain than before.
One of the earliest, largest and most famous examples of vertical integration was the Carnegie Steel company. The company controlled not only the mills where the steel was manufactured, but also the mines where the iron ore was extracted, the coal mines that supplied the coal, the ships that transported the iron ore and the railroads that transported the coal to the factory, the coke ovens where the coal was coked, etc.
Later on, Carnegie even established an institute of higher learning to teach the steel processes to the next generation (venturenavigator). Vertically integrated knowledge management systems, also sometimes referred to a stove piped systems, collect and disseminate information to a specific business unit up and down the chain of command. An example of vertical integration would be a system used by only the sales group that collects information about sales leads and disseminates that information to individuals throughout the chain of command.
The majority of information systems today are more vertically integrated then horizontally integrated. Reasons for this include political, technical, and financial reasons (chrisbunk.com). One of the best examples of vertically integrated companies is the oil industry.
Oil companies, both multinational (such as ExxonMobil, Royal Dutch Shell, or BP) and national (e.g. Petronas) often adopt a vertically integrated structure. This means that they are active all the way along the supply chain from locating crude oil deposits, drilling and extracting crude, transporting it around the world, refining it into petrochemicals such as gasoline, to distributing the fuel to company-owned retail stations, where it is sold to consumers. Until recently, Apple was one of the few vertically integrated businesses in the IT sector.
The company made the computer hardware, accessories, operating system and some of the software itself. Today, Apple Computer still designs its computers; production however is outsourced to specialized suppliers such as Flextronics who also manufacture computers for other companies. This arrangement is found for most high-tech companies today. Some argue that vertical integration will eventually hurt a company because when new technologies are available, the company is forced to reinvest in its infrastructures in order to keep up with competition.
Some say that today, when technologies evolve very quickly, this can cause a company to invest into new technologies, only to reinvest in even newer technologies later, thus costing a company financially. However, a benefit of vertical integration is that all the components that are in a company product will work harmoniously, which will lower downtime and repair costs (associatepublisher). Vertical expansion is the growth of a business enterprise through the acquisition of companies that produce the intermediate goods needed by the business or help market and distribute its product. Such expansion is desired because it secures the supplies needed by the firm to produce its product and the market needed to sell the product.
The result is a more efficient business with lower costs and more profits. Related is lateral expansion, which is the growth of a business enterprise through the acquisition of similar firms, in the hope of achieving economies of scale. Vertical expansion is also known as a vertical acquisition. Vertical expansion or acquisitions can also be used to increase scales and to gain market power. The acquisition of DirecTV by News Corporation is an example of forward vertical expansion or acquisition. DirectTV is a satellite TV company through which News Corporation can distribute more of its media content: news, movies, and television shows. The pending acquisition of NBC by Comcast Cable (as of January 16, 2010) is an example of backward vertical integration (enotes).
http://www.associatepublisher.com/e/v/ve/vertical_integration.htm http://www.chrisbunk.com/ http://www.enotes.com/topic/Vertical_integration http://www.venturenavigator.co.uk/content/310 Caligiuri, Paula, David Lepak and Jaime Bonache; Managing the Global Workforce; 2010