Vertical integration is an economic term that describes the merging of two different types business into one or the merging of two different lines of production within one business. What makes this type of merging, or integration, vertical is the fact that one of the businesses or lines of production is different from the other. This tactic is often an industry response to sharing limited or scarce resources.
Usually the difference between the businesses that causes vertical integration is their level of production, but sometimes supply and demand starts the process. Vertical integration occurs any time company productivity increases following a merger of departments or businesses. Vertical integration is not always a change in the way companies do business or the work they perform. For example, an orange juice manufacturer may decide to buy their supplier in order to cut costs without changing the day-to-day operation of either business.
Before a business attempts a vertical merger, they need to know that the process is relatively expensive and often difficult to reverse. Vertical integration is an aggressive move to edge more profits from resources and customers. Other types of integration, like forward integration, that involve growing are similar to vertical integration.