For transferring skills and capabilities from one business to another

Gaining control on supplies with respect to quality (tea processor going for own plantation), quantity (auto components manufacturer), or price (printing facility can be cheaper, if in house)

Building on core competencies and technologies (precision engineering company entering into another product market with similar technical requirement)

Spreading risk and resource utilization- example: ITC, Wipro, Tata

Cost savings (a fully integrated business)

Control of markets - companies like LG, Samsung, Liberty (shoes), etc., own retail outlets

Related diversification is achieved in three possible formats: -

Backward integration: backward integration is achieved by a firm by getting into operations involving manufacturing and/or supplies of raw material, components, or processing machineries. Backward integration also involves a firm getting into logistics operations (transportation) and financing.

Horizontal integration: for achieving horizontal integration a firm acts on its product offerings by introducing complementary products, competitive products and making better utilization of the by-products.

Forward integration: firms usually achieve forward integration by extending their control over distribution operations such as company owned showrooms, obtaining better market information, developing in house service and repair operations which may have been outsourced earlier, and logistics (transportation).

One of the best examples of a completely vertically integrated company Indian business scenario is Reliance Petrochemicals. Reliance's petroleum business starts from back end operations of oil exploration, further continuing it with oil refining at the horizontal level and finally distributing the oil through company owned petrol pumps at the forward end.

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* Contributed by -
Ankit Kapoor & Gaurav Dubey,
PGDBM - 2006,
IMT Ghaziababd.