Vertical Diversification (Integration)

Vertical diversification is also known as vertical integration. In this growth strategy, a company expands its business in the forward or backward direction. Firms add new products (or services) complementary to the existing products. If a firm manufactures rayon and textiles, it grows through vertical diversification.

When a firm converts the inputs into output, the transformation takes place in a number of stages, for example, purchase of raw material, manufacturing processes, assembly, distribution and sale. Vertical diversification defines whether to perform some or all of these functions. It is joining together of two or more firms which produce goods which are in successive stages of production. There are two forms of vertical integration:

 1. Backward Integration:

It is form of vertical integration where firms integrate backwards to produce their inputs or raw materials. Rather than buying the inputs from outside, firms manufacture their inputs. If sugar mills own sugarcane farms, they are said to have diversified through backward integration.

2. Forwarded Integration:

“Forward integration is a type of diversification strategy which involves the entry of a firm into the business of finishing, distributing, or selling of some of its present outputs. “ It refers to “moves altering the nature of the distribution of the firm are output (toward end users). “ It involves entry of firms into distribution outlets to maintain direct contact with consumers. Rather than selling through intermediaries, firms that diversify through forward integration maintain their own sales outlets. Bombay Dyeing, DCM etc. have their own retail outlets. This enables them to maintain control over the channels of distribution.

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