Vertical integration is a corporate strategy employed by firms to gain competitive advantage by operating in several businesses at the same time. Of course firms could use several other kinds of corporate strategies such as strategic alliances, diversification, and mergers & acquisitions.
A value chain is the set of activities that must take place for a product or service to come to fruition and be sold to a customer (raw material to final sale). Michael Porter introduced the concept of the value chain in 1985. A good example of is the milk industry. A very simplified chain would be as follows:
Breading > Management of animals > Milk production > Short term storage > Transport to processing > Processing/Pasteurization > Packaging > Shipping distributor > Shipping to retailer > Selling to consumer
When a firm vertically integrates, they basically are involved in the individual steps within the industry’s value chain. Dean Foods, the United States largest processor and distributor of milk, is involved in four of the above activities, processing, packaging, and shipping (both to distributors and retailers). They also took steps to get closer to consumers by purchasing many small local dairy brands, including South Florida’s Macarthur. More likely than not, if you are drinking milk or eating ice cream bearing the brand name of what you think is a local dairy, your consuming a Dean Foods’ product. This is an example of forward vertical integration. In this case the firm took steps to get closer to the end of the value chain, in other words closer to their end consumer. If they wanted to go even further, they might consider opening ice cream/milk shake shops ...