You can thank John D. Rockefeller for both horizontal and vertical integration, as he's widely credited with being the father of both. Standard Oil was an industrial titan whose influence can be felt in our world to this very day, and the Rockefeller's, along with the Kennedy's and a few others, are the closest thing to "royalty" we have in the United States.
A Brief Overview
If you've heard the term but aren't sure what it means, exactly, vertical integration is all about controlling the supply chain. For instance, if you make clock radios that will, at the push of a button tell you the time verbally in sixteen different languages as well as displaying the time on the ceiling, then odds are that you don't make each item from scratch in your factory.
You probably buy the clocks themselves from one place, a chip set from another place, and before you actually get the chips, they're probably sent to some other group that programs them with the languages you support and the functionality to display the time via a projector. In our simple example then, we've got four pieces: You, the chip makers, the chip programmers, and the clock makers. All those pieces have to move together in perfect harmony or disaster strikes.
If you get the chips but not the clocks, your factory stands idle. If the chips come to you without first routing to the guys who do the programming, you release faulty (non functional) equipment. There are all sorts of ways that even this simplistic relationship can go sideways. Now imagine a business much more like your own, with a whole array of products composed of scores of different parts from dozens of different suppliers. See how the whole thing can get complicated quickly?
Vertical integration seeks to keep a firm handle on things by having a single company (you) own the supply chain from end to end. You own the chip factory, and the guys who do the coding, and the clock makers, and because you own them, you have a lot more control over how they operate and can thus better ensure that your materials get where they need to be, when you need them there. Simple concept, tough to execute (to say nothing of the expense!)
WalMart: A Case Study
It's expensive, yes, but it's also well worth the investment. Walmart has been ruthlessly pursuing vertical integration strategies since their first store opened, and now they sell more than a billion dollars of product a day. There's something to it.
The chief advantage is, of course, better real time data sharing, and to make that work, you need today's digital technologies and blazing fast connection speeds. It's not the computers that have been the bottleneck, but the bandwidth. Computers have been able to handle the influx of data from inventory management and supply chain systems for years, but it's only been recently that the bandwidth has been able to see us achieve something close to real time data, allowing for real time decision making.
When Standard Oil was broken into 33 different companies, it made Mr. Rockefeller the richest man in the world, and he didn't have the first computer to help him achieve the level of vertical integration he was ultimately able to. Walmart has taken up the mantle and shown us what is possible with today's technology, and their supply chain management is so effective that the US Army has actually sent their Quarter Masters to train at Walmart data centers in order to get a feel for how they do things.
That's how potent Walmart's system of vertical integration is. You don't have to be a multi-billion dollar company to copy their winning moves, and this is something you should take a serious look at. New technology has allowed this strategy to be taken to a whole other level.
