Vertical growth can be achieved by taking over a function previously provided by a supplier or by a distributor. The company, in effect, grows by making its own supplies and/or by distributing its own products. This may be done in order to reduce costs, gain control over a scarce resource, guarantee quality of key input, or obtain access to potential customers.
Eg: Henry Ford used internal company resources to build his River Rouge Plant outside Detroit. The manufacturing process was integrated to the point that iron ore entered one end of the long plant and finished automobiles rolled out the other end into a huge parking lot.
Cisco Systems, the maker of Internet Hardware, chose the external route to vertical growth by purchasing Radiata, Inc., a maker of chips sets for wireless networks. This acquisition gave Cisco access to technology permitting wireless communications at speeds, previously possible only with wired connections.
Vertical growth results in vertical integration, the degree to which a firms operates vertically in multiple locations on an industry’s value chain from extracting raw materials to manufacturing to retailing.
More specifically, assuming a function previously provided by a supplier is called backward integration (going backward on an industry’s value chain). The purchase of Pentasia Chemicals by Asian Paints Limited for the chemicals required for the manufacturing of paints is an example of backward integration.
Assuming a function previously provided by a distributor is labeled forward integration (going forward an industry’s value chain). Arvind mills, Egample, used forward integration when it expanded out of its successful fabric manufacturing business to make and market its own branded shirts and pants.
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