define vertical integration in travel and tourism

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• Vertical Integration
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Vertical Integration Explained: How It Works, With Types and Examples

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

What Is Vertical Integration?

Vertical integration is a strategy that allows a company to streamline its operations by taking direct ownership of various stages of its production process rather than relying on external contractors or suppliers. Companies can achieve vertical integration by acquiring or establishing their own suppliers, manufacturers, distributors, or retail locations rather than outsourcing them. Vertical integration can be risky due to the significant initial capital investment required.

Key Takeaways

• Vertical integration requires a company's direct ownership of suppliers, distributors, or retail locations to obtain greater control of its supply chain.
• The advantages can include greater efficiencies, reduced costs, and more control along the manufacturing or distribution process.
• Vertical integration often require heavy upfront capital that may reduce a company's long-term flexibility.
• Forward integration occurs when a vendor attempts to acquire a company further along the supply chain (i.e. acquire a retailer).
• Backward integration occurs when a vendor attempts to acquire a company prior to it along the supply chain (i.e. a raw material provider).

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How Vertical Integration Works

Vertical integration occurs when a company attempts to broaden its footprint across the supply chain or manufacturing process. Instead of sticking to a single point along the process, a company engages in vertical integration to become more self-reliant on other aspects of the process. For example, a manufacturer may want to directly source its own raw materials or sell directly to consumers.

The supply chain or sales process typically begins with the purchase of raw materials from a supplier and ends with the sale of the final product to the customer. Vertical integration requires a company to take control of two or more of the steps involved in the creation and sale of a product or service. The company must buy or recreate a part of the production , distribution, or retail sales process that was previously outsourced.

Companies can vertically integrate by purchasing their suppliers to reduce manufacturing costs. They can invest in the retail end of the process by opening websites and physical stores. They can invest in warehouses and fleets of vans to control the distribution process.

All of these steps involve a substantial investment of money to set up facilities and hire additional talent and management. Vertical integration also ends up increasing the size and complexity of the company's operations.

As a company engages in more activities along a single supply chain, it may result in a market monopoly. A monopoly that occurs due to vertical integration is also called a vertical monopoly.

Types of Vertical Integration

There are a number of ways that a company can achieve vertical integration. Two of the most common are backward and forward integration.

Backward Integration

A company that chooses backward integration moves the ownership control of its products to a point earlier in the supply chain or the production process.

This form of vertical integration is aptly named as a company often strives to acquire a raw material distributor or provider towards the beginning of a supply chain. The companies towards the start of the supply chain are often specialized in their distinct step in the process (i.e. a wood distributor to a furniture manufacturer). In an attempt to streamline processes, the furniture manufacturer would try to bring the wood sourcing in-house.

Amazon ( AMZN ) started as an online retailer of books that it purchased from established publishers. Although it continues to do so, it also became a publisher. The company eventually branched out into thousands of branded products. Then, it introduced its own private label, Amazon Basics, to sell many of them directly to consumers.

Forward Integration

A company that decides on forward integration expands by gaining control of the distribution process and sale of its finished products.

A clothing manufacturer can sell its finished products to a middleman , who then sells them in smaller batches to individual retailers. If the clothing manufacturer were to experience forward vertical integration, the manufacturer would join a retailer and be able to open its own stores. The company would aim to bring in more money per product, assuming it can operate its retail arm efficiently.

Forward integration is a less common form of vertical integration because it is often more difficult for companies to acquire others that are further along the supply chain. For example, the largest retailers at the end of the supply chain often have the greatest cash flow and purchasing power . Instead of these retailers being acquired, they often have the capital on hand to be the acquirer , which is an example of backward integration.

Balanced Integration

A balanced integration is an approach to vertical integration where a company aims to merge with companies both before it and after it along the supply chain. A company must be the middleman and manufacture a product to engage in balanced integration. That's because it must both source raw materials as well as work with retailers to deliver the final product.

Consider the supply chain process for Coca-Cola ( KO ) where raw materials are sourced, the beverage is concocted, and bottled drinks are distributed for sale. Should Coca-Cola choose to merge with both its raw material providers as well as retailers who will sell the product, the company is then engaging in balanced integration.

Though most costly and risky due to the diversified nature of business operations, balanced integration also poses the greatest upside as a company is more likely to have greater (if not full) control over the entire supply chain process.

Although vertical integration can reduce costs and create a more efficient supply chain, the capital expenditures involved can be significant.

Advantages and Disadvantages of Vertical Integration

Vertical integration can help a company reduce costs and improve efficiency. However, when executed poorly, vertical integration may have negative consequences on the company.

The primary goal of vertical integration is to gain greater control over the supply chain and manufacturing process. When performed well, vertical integration may lead to lower costs, economies of scale , and a lower reliance on external parties.

Vertical integration may lead to lower transportation costs, smaller turnaround times, or simpler logistics if the entire process is managed in-house. This may also result in higher quality products as the company has direct control over the raw materials used through the manufacturing line.

Companies may sometimes find themselves at the whim of suppliers who have market power. Through vertical integration, companies can circumnavigate external monopolies . In addition, a company may gain insights from a retailer on what goods are selling best; this information may be very useful in making manufacturing and product decisions.

Disadvantages

Companies can't vertically integrate overnight. In fact, it is a long-term process that requires widespread buy-in. This also includes heavy upfront capital expenditure requirements to acquire the proper company, integrate new and existing systems, and ensure that staff is trained across the entire manufacturing process.

By vertically integrating, companies do sacrifice some degree of flexibility. This is because they commit capital to a specific process or product. Instead of being able to decline purchasing from an external vendor , a company will likely have committed money that can not be easily recovered. In addition, a company may lose the opportunity to gain unique knowledge through different external vendors .

Vertical integration may also have several social impacts. Companies may end up trying to do too much and lose focus on their ultimate goal. In addition, customers may not support the culture of a large manufacturer also interfacing directly with customers.

Long-term cost saving due to favorable pricing and minimal supply chain disruptions

Economies of scale, which increase efficiency

Reduces or eliminates the need to rely on external parties/suppliers

Greater control over the product, inputs, and process, which may lead to superior products

Requires large upfront capital requirements to implement

Reduce a company's long-term flexibility

Loss of focus on a company's primary objective or customer

Displeased customer base that would prefer to work with smaller retailer

Vertical Integration vs. Horizontal Integration

Vertical integration involves the acquisition of a key component of the supply chain that the company has previously contracted for. It may reduce the company's costs and give it greater control of its products. Ultimately, it can increase the company's profits.

Horizontal integration , on the other hand, involves the acquisition of a competitor or related business. A company may do this to accomplish any or all of the following:

• Eliminate a rival and cut out its competition
• Improve or diversify its core business
• Expand into new markets
• Increase its overall sales

While a vertical integration strategy stretches a company along a single process, horizontal integration is a more pointed approach that causes a company to become more specific or niche within a certain market. For example, instead of engaging in all aspects of a supply chain ranging from materials sourcing, manufacturing, or retail, a company can choose to master only one of those facets by acquiring similar companies to engage in horizontal integration.

Much analysis has gone into reviewing when it is more optimal to simply contract with another company as oppose to acquire them. Published modern economic theory on the matter dates back decades.

Examples of Vertical Integration

Netflix ( NFLX ) is a prime example of vertical integration. The company started as a DVD rental business before moving into online streaming of films and movies licensed from major studios. Executives then realized they could improve their margins by producing some of their own original content like the hit shows "Grace & Frankie" and "Stranger Things." It also produced some bombs, like 2016's The "Get Down," which reportedly cost the company $120 million.

The company now uses its distribution model to promote its original content alongside programming licensed by studios. Instead of simply relying on the content of others, Netflix performed vertical integration to become more engaged in the entertainment development process earlier.

Fossil Fuel Industry

The fossil fuel industry is a case study in vertical integration. British Petroleum ( BP ), ExxonMobil ( XOM ), and Shell ( SHEL ) all have exploration divisions that seek new sources of oil and subsidiaries that are devoted to extracting and refining it. Their transportation divisions transport the finished product. Their retail divisions operate the gas stations that deliver their product.

Live Nation & Ticketmaster

The merger of Live Nation and Ticketmaster in 2010 created a vertically integrated entertainment company that manages and represents artists, produces shows, and sells event tickets. The combined entity manages and owns concert venues, while also selling tickets to the events at those venues.

When Is an Acquisition Considered Vertical Integration?

An acquisition is an example of vertical integration if it results in the company's direct control over a key piece of its production or distribution process that had previously been outsourced.

A company's acquisition of a supplier is known as backward integration. Its acquisition of a distributor or retailer is called forward integration. In the latter case, the company is often buying a customer, whether it was a wholesaler or a retailer.

Is Vertical Integration Good for a Company?

Whether vertical integration makes sense for a company depends on what's good for it in the long run. If a company makes clothing with buttons, it can buy the buttons or make them. Making them eliminates the markup charged by the button-maker. It may give the company greater flexibility to change styles or colors while eliminating the frustrations that come with dealing with a supplier.

Then again, the company would have to set up or buy a whole separate manufacturing process for buttons, buy the raw materials that go into making and attaching buttons, and hire people to make the buttons along with a management team to manage the button division.

What Is the Difference Between Vertical Integration and Horizontal Integration?

Vertical integration is the practice of acquiring different pieces along a supply chain that a company does not currently manage. Horizontal integration is the practice of acquiring similar companies to further master what it already does. Vertical integration makes a company broader while horizontal integration may help it penetrate a specific market further.

Why Do Companies Use Vertical Integration?

Companies use vertical integration to have more control over the supply chain of a manufacturing process. By taking certain steps in-house, the manufacturer can control the timing, process, and aspects of additional stages of development. Owning more of the process may also result in long-term cost savings (as opposed to buying outsourced goods at marked-up costs).

Vertical integration is the business arrangement in which a company controls different stages along the supply chain. Instead of relying on external suppliers, the company strives to bring processes in-house to have better control over the production process. Though vertical integration may result in increased upfront capital outlays, the goal of vertical integration is to streamline processes for more efficient and controlled operations in the long-term.

Harvard Library. " The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration ."

Variety. " Inside the Troubled Production of Baz Luhrmann's 'The Get Down,' Netflix's Most Expensive Series Yet ."

U.S. Securities and Exchange Commission. " Form 10-K, Netflix, Inc. ," Page 30.

U.S. Securities and Exchange Commission. " Live Nation and Ticketmaster Entertainment Complete Merger ."

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How Does Vertical Integration Work? Pros, Cons and Examples

Disruptions in distributed supply chains have made news in recent years because they have prevented customers from getting the products they want, when they want them, hurting companies’ finances and damaging their reputations. One way companies can exert more control over their supply chains is through vertical integration, whereby they take ownership of more steps in the manufacture and sale of their products and services.

In theory, vertical integration helps a company secure more aspects of the supply, production and distribution functions and, ultimately, the sale of its goods and services, improving efficiencies and reducing costs along the way. While some companies achieve significant competitive advantage through vertical integration, the approach requires sizable capital investments and, in some cases, can limit the flexibility that comes from partnering with a federation of suppliers. Companies must consider the business case for vertical integration — the costs, benefits and challenges — very carefully.

What Is Vertical Integration?

Most companies rely on a number of suppliers and partners to produce and distribute their products, from raw material suppliers and manufacturing partners to distributors and retailers. Vertical integration refers to any effort by a company to take ownership of two or more steps in this supply chain, thereby “integrating” them into its own business. Rather than focusing solely on a single aspect of the process — say, ecommerce sales or finished manufacturing — the company opts to extend its reach and market power either forward or backward along the supply chain. Sometimes, a company will integrate in both directions. Some do this by building their own capabilities from the ground up, and others do it via merger and acquisition.

However it’s done, the idea is to gain more control over supply chain processes by bringing more of them in-house. Vertical integration requires sizable up-front financial outlays. But, in the right circumstances, the strategy can serve to streamline a company’s journey from raw materials to the delivery of a product into a customer’s hands, reducing costs and raising customer value — which can yield competitive and financial advantages over the long term.

A manufacturing company, for example, may decide to backward-integrate by sourcing its own raw materials — giving it greater visibility for managing its inventory of those materials — or forward-integrate by selling directly to end customers, eliminating distributors and/or retailers. Many companies have embraced vertical integration, from oil and gas leaders to high-tech firms. In some cases, vertical integration has been elemental to corporate survival and success. In others, vertical integration has proven costly and even led to corporate failure.

Key Takeaways

• Vertical integration involves a company taking ownership of two or more steps in its supply chain.
• It’s often categorized directionally: Companies can integrate upstream processes (backward integration), downstream stages (forward integration) or both (balanced integration).
• As vertical integration expands a company’s market footprint, it usually requires hefty up-front investment and can be operationally challenging.
• When done well, benefits include lower costs, greater control, improved visibility and more.
• Weighing the pros, cons, costs and return on investment for a vertical integration initiative requires access to high-quality supply chain data and analytics.

Vertical Integration Explained

To illustrate how vertical integration might proceed, consider the steps in a supply chain. Typically, the process begins with the purchase of raw materials, then proceeds through various stages of production, from which a finished product emerges, is distributed and, ultimately, sold to the end customer. A nonvertically integrated company might implement just one piece in that chain of processes. If the company wants to vertically integrate, it must expand its operations to include steps before and/or after the step it already performs. The company may choose to acquire one or more of its suppliers in hopes of reducing manufacturing costs or gaining more control over production. Or it might invest in the retail end of the process, opening physical stores or introducing ecommerce capabilities to get closer to the customer and increase profit margins. It might invest in warehouses and vehicle fleets to take more control over distribution and logistics.

When a company decides to vertically integrate, it always faces a build-or-buy decision. The company may choose to build some part of the production, distribution or retail sales process from scratch, re-creating one or more aspects of the supply chain that it had previously outsourced. Alternatively, they may buy their way into vertical integration, acquiring or merging with suppliers, manufacturers, distributors or retailers.

Whether they build or buy, vertical integration is a big investment. Companies must devote significant up-front capital, whether they are establishing their own capabilities or attaining them through mergers and acquisitions. They have to build or purchase physical facilities, hire additional employees and management and invest in new business processes and technologies — all of which increases the size and complexity of the overall organization.

Types of Vertical Integration

There are several types of vertical integration. A company may expand further “upstream” in the supply chain (backward integration), further “downstream” (forward integration) or move in both directions (balanced integration). Any approach in which a company eliminates steps in the journey from raw materials through production to the customer can be called disintermediation, but that term is usually reserved for when companies try to take over a step between themselves and the final customer.

Backward Integration

Backward integration happens when a company moves a process in-house so as to take control of earlier, or upstream, steps in the supply chain process. Fast-food restaurant McDonald’s is a good example of backward integration, having taken ownership of certain processes all the way back to the agricultural production that supplies ingredients for its eateries.

Forward Integration

By contrast, forward integration is when a company takes ownership of processes further along, or downstream, in the supply chain, perhaps by taking control of distribution or sales of finished goods and services. Nike, for example, took a forward integration approach in establishing its own retail stores. The Walt Disney Company’s launch of the Disney+ streaming service, which allows it to deliver its entertainment library directly to consumers, is another example.

Balanced Integration

When a company vertically integrates processes both upstream and downstream, it’s pursuing balanced integration. Naturally, this can occur only when a company sits somewhere in the middle of a supply chain (rather than at one end or the other). Balanced integration can be trickier to pull off but can also offer greater benefits when executed well. Apple, for example, extended itself both forward in the supply chain with the opening of its retail stores and backward, when it designed its own semiconductors.

Disintermediation

Disintermediation refers to the process of removing intermediaries — aka “middlemen” — from a company’s supply chain, usually to get closer to the customer but always to reduce costs and increase efficiencies. Computer manufacturer Dell and electric-auto maker Tesla are examples. Both opted to exclusively sell their products direct to consumers rather than rely on distributors, dealerships and retailers. Tesla also offers an example of balanced integration, as it operates its own plants and designs its own batteries and charging stations, in addition to its direct sales approach.

Benefits and Drawbacks of Vertical Integration

When companies can make a clear case for the value of vertical integration — for example, to address supply or demand risks — and have the capabilities to pursue it, vertical integration can help a company reduce costs, improve efficiency and have more control over its supply chain. When executed poorly or without a clear rationale, vertical integration can be a costly mistake. Vertical integration often involves trade-offs, requiring companies to carefully evaluate the advantages and disadvantages relative to their specific circumstances.

Benefits. Among the most notable potential benefits of vertical integration are: greater economies of scale, as an organization’s fixed-cost base is spread across a larger range of operations; the migration of some fixed, external costs (e.g., logistics) to variable costs, over which the organization has greater control; fewer supply chain disruptions, or at least more visibility , which gives the company an earlier warning when a possible disruption is coming; lower lead time ; and faster time to market, because with more control over the supply chain, the company can prioritize new-product activities when it is advantageous to do so. Thinking further, cases of forward integration could lead to improved customer or market insight; and that, together with greater control over supply chain inputs and processes, can lead to higher quality products and services. Taking ownership of more steps in a supply chain may even help a company deal with inflation . Together, all these benefits add up to an organization that is better able to synchronize supply and demand and capture more of the available profit margin in a given market.

Drawbacks. But a successful vertical integration means a company must manage multiple challenges, any one or combination of which could derail those benefits and leave the organization worse off. Vertical integration is not a quick fix — it’s a long-term strategy that requires significant up-front capital expenditures and yet may take a relatively long time before its returns are realized. So, it requires a long-term commitment at all levels of the organization, especially the C-suite. By definition, vertical integration increases organizational complexity — it means a company must add to its existing operations, and, if it is to realize the potential benefits, it must thoughtfully integrate those operations with existing processes and systems. In some ways, it can decrease an organization’s flexibility relative to partnering because of the sunk investment in infrastructure. It can decrease an organization’s focus on its original core competencies. And, in extreme cases, a company that is very successful at vertical integration can catch the eyes of antitrust regulators.

Degrees of Vertical Integration

Companies that pursue vertical integration should understand the risks and rewards of the strategy. They should also consider the degree to which vertical integration makes sense for the organization. Companies do not necessarily have to go “all in” with a vertical integration approach to achieve some significant benefits. There are varying degrees of integration to explore, from full integration to none at all.

Full vertical integration

For any given organization, full vertical integration can mean one of two things. Most often, it refers to an organization that seeks to acquire or build all the assets, resources, capabilities and skills necessary to take over one entire step in its supply chain, either upstream or downstream. But it can also refer to an organization that takes full control over all the steps in its supply chain, from the raw materials to the customer’s doorstep.

Quasi vertical integration

There is a wide variety of strategies that stop short of total integration that companies can employ to secure some of the benefits of vertical integration via a more contained — and, therefore, less risky — investment. Often, this means acquiring a minority interest in one or more upstream or downstream companies. It could also involve joint ventures, strategic alliances, asset acquisitions, technology licenses and franchising opportunities, all of which entail lower up-front costs and can offer greater flexibility than fully integrating a supply chain process .

Long-term contracts

Companies can exert more control upstream or downstream by signing long-term contracts with a partner, potentially increasingly predictability and/or decreasing costs.

Spot contracts

In contrast to long-term contracts, which offer some consistency and predictability, trading in the so-called spot market occurs when companies purchase supplies as needed for the next step in the production process. Sitting at the opposite end of the spectrum from full vertical integration, these are one-off transactions for satisfying immediate needs.

Vertical Integration Examples

Carnegie Steel was one of the first and most significant examples of balanced, full vertical integration. By the 1890s, the industrial giant had acquired all sources of supply, as well as logistics and shipping. The company wielded significant market power, owning and operating iron ore and coal mines, steel mills and coal processing plants, and even the ships and railroads that moved everything throughout the supply chain.

Historically, the telecommunications industry has been tightly integrated, initially to ensure end-to-end control of the complex infrastructure required to deliver telephone services. Throughout the 20th century, most telephone companies made their own telephones, telephone cables and other supplies; they also sold and delivered their services directly to customers.

The oil and gas industry has been marked by extreme vertical integration (and, sometimes, disintegration). Exxon Mobil, for example, has integrated each stage of the industry value chain within its business units. Its upstream division owns and manages global production assets and processes. Its downstream division includes refineries and retail outlets. And its chemical division produces synthetic petrochemical products. Similarly, BP has an upstream segment responsible for oil and gas exploration, development and production, as well as a downstream segment that includes a logistics and retail network to ship and sell its fuels, lubricants and petrochemicals.

The merger of Live Nation and Ticketmaster in 2010 offers another case study in balanced vertical integration. For Ticketmaster, which sells tickets to events, the transaction represented forward integration, while for Live Nation (which produces events), it was a backward integration strategy.

SpaceX offers a more recent example of vertical integration. In contrast to competitor United Space Alliance (a joint venture between aerospace companies Boeing and Lockheed Martin), SpaceX manufactures most components in-house, which lowers its costs to the tune of $370 million per launch.

Is It Time to Integrate? Your NetSuite Data Can Tell You

Companies with good supply chain visibility will be in the best position to assess opportunities for vertical integration within their own value chains. NetSuite’s Supply Chain Management capabilities make it easier for companies to track spending and monitor supplier performance over time, with an eye toward the potential benefits of integration. And, for those organizations that do make the leap to greater vertical integration, robust supply chain management software is critical to optimizing integrated operations and unlocking the full value of the investment. NetSuite software can empower vertically integrated companies to reduce the costs associated with planning and executing supply chain processes, improve inventory management , increase cash flow, and identify and mitigate risk with predictive analytics and scenario planning.

Vertical integration can be difficult to capitalize on — it’s costly, complex and not easily undone. However, when well executed, it can confer a number of advantages, including greater control, reduced costs, increased profitability, better product or service quality, increased customer and market insights and more. Those companies with good visibility into their existing supply chain in either direction, along with access to integrated data analytics, will be best equipped to explore the opportunities of vertical integration.

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Vertical Integration FAQs

When is an acquisition considered vertical integration?

Not all corporate acquisitions result in vertical integration. However, when a company acquires a trading partner (either a supplier or a customer), it is an example of vertical integration because it results in the company owning and operating more steps in its supply chain.

What’s the difference between vertical and horizontal integration?

With horizontal integration, a company is expanding its reach in its existing area of core competency (say, a manufacturer acquiring another manufacturer or an accounting firm acquiring another accounting firm). With vertical integration, a company is reaching beyond its existing area of focus to take on additional roles in the product or service value chain, whether that’s a technology company that takes over the sourcing and production of its components or a luxury-goods maker that expands into retail sales.

What is vertical and horizontal integration?

Horizontal integration takes place when a company acquires a competitor or related business, expanding its footprint in its core competency. A grocery chain may buy a rival chain to, say, eliminate competition, expand into new geographic markets or increase its overall sales. Vertical integration involves the acquisition of a key component of a company’s supply chain, either upstream or downstream from its own core competency. Companies pursue vertical integration for a number of reasons, including increased control, reduced costs or improved margins. When a company takes over an upstream step, such as a manufacturing business taking over sourcing of raw materials, it is called backward integration. When a company brings a downstream step in-house, such as a manufacturer that opts to open retail or ecommerce direct sales channels, it is called forward integration. A company could also pursue a balanced integration approach, expanding its reach in both directions.

Is vertical integration profitable?

In short, it depends. A number of variables can determine the profitability of a vertical integration strategy. Examples of successful and failed vertical integration abound. In addition, there are different approaches and degrees of vertical integration possible. A vertical integration strategy can deliver advantages, including greater economies of scale, lower variable production costs, decreased logistics costs and quality concerns and — yes — increased profitability. However, full vertical integration takes time, requires significant capital investment and can result in increased complexity and decreased flexibility. Companies must consider the advantages and costs of a specific vertical integration approach carefully. Some companies are able to secure significant competitive advantage via vertical integration, while others may determine that the costs of integration outweigh its benefits.

What is an example of vertical integration?

Carnegie Steel was one of the first examples of full vertical integration. By the 1890s, Carnegie owned mines for iron ore and coal, steel mills and coal processing plants, as well as the ships and railroads that moved raw materials and finished products throughout the supply chain. Similarly, some of the world’s largest oil and gas companies control both downstream and upstream operations, from exploration and extraction to refining and logistics to retail and business sales. Technology giants Amazon and Apple have pursued balanced integration opportunities over the years. (Balanced integration is when a company acquires steps in the supply chain both preceding and following its own link in the chain.) Electric-auto maker Tesla embraced balanced integration from the start, running and operating its own plants and opting to sell its products directly to consumers.

What is a vertical integration structure?

A vertical integration structure involves a company taking over multiple stages of its production or sales processes rather than relying on external suppliers and trade partners.

What is vertical integration in economics?

In economics, vertical integration is the term used to describe a business strategy in which a company takes ownership of two or more key stages of its supply chain. A vertically integrated automaker, for example, might produce automobile components and vehicles and also sell directly to customers.

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The chain of distribution: Made easy!

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The chain of distribution is an important concept to understand when studying or working in travel and tourism. Whilst the title may sound complicated, it is actually very simple. In this article I will provide you with an explanation of what is meant by the term chain of distribution and I will explain the different levels of the chain. I will also provide some examples of travel and tourism companies that you might find at each level.

What is the chain of distribution?

Wholesalers, to conclude: chain of distribution, further reading.

The chain of distribution is the series of companies or businesses that are involved in transporting, storing and providing goods and services to customers.

The chain of distribution is often represented visually using a chart. This chart demonstrates the different elements of the chain of distribution at different levels. The levels are typically given the titles of: principals, wholesalers, retailers, consumers.

The chain of distribution helps us to understand horizontal and vertical integration .

Elements of the chain of distribution

There are four key elements within the typical chain of distribution that are commonly noted.

However, it is important to note that not all businesses and business structure will follow this ‘chain’. Sometimes there will be only one element and sometimes there may be more than four. Each business system is different and is designed in order to ensure that business operations are as efficient and effective as possible. As such, the chain of distribution is more of a guide than a rule!

The principals are the core elements that are being sold to the consumer.

Within the tourism industry this includes a wide variety of products and services including accommodation, transport, attraction tickets and ancillary products and services.

Examples: Marriott hotel room, Airbnb apartment, easyJet flight booking, ticket to Disney, Jordan pass

The wholesalers are the people who packager the product.

Within the travel and tourism industry, the biggest wholesaler is represented as a tour operator. A tour operator is the organisation who takes various aspects of the travel experience and packages them together. This is then traditionally sold by a travel agent.

Many organisations choose to undertake their tour operations and travel agents elements together, so it may not always be transparent to the consumer that these are actually two separate stages in the chain of distribution.

Nowadays, many tourists are moving away from booking package holidays organised through tour operators. Many people are now putting together their own holiday packages online; known as dynamic packaging .

Examples: TUI, Expedia, Kuoni, Kox and Kings

The retailers are the organisations that sell the products and/or services.

Within travel and tourism, we often refer to travel agents as being the most common retailers.

Traditionally, travel agents would have high street shops. However, in recent years many of these have been closing down. Instead, people are using these travel agent’s online provisions.

People are also frequently choosing to avoid travel agents altogether and book their holidays independently.

Examples: TUI, Travel Supermarket, STA Travel

The consumers are the customers who purchase the products and/or services.

There are many different types of tourists . The most common types of tourists include business travellers, leisure tourists, domestic tourists, international tourists and people who a visiting friends and relatives (VFR).

Examples: Families, employees, relatives, students

When studying travel and tourism it is important that you understand the chain of distribution. This chain includes four key elements, however it is important to remember that this is not a rigid rule, rather it is a guideline for understand how different organisations interact and work together in the travel and tourism industry.

If you’re studying travel and tourism then I highly recommend the following texts to support your learning:

• An Introduction to Tourism : a comprehensive and authoritative introduction to all facets of tourism including: the history of tourism; factors influencing the tourism industry; tourism in developing countries; sustainable tourism; forecasting future trends.
• The Business of Tourism Management : an introduction to key aspects of tourism, and to the practice of managing a tourism business.
• Tourism Management: An Introduction : gives its reader a strong understanding of the dimensions of tourism, the industries of which it is comprised, the issues that affect its success, and the management of its impact on destination economies, environments and communities.

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Tourism Distribution

• First Online: 09 May 2021

Cite this chapter

• Richard George 2  

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This chapter explores distribution channels and their role in the international tourism industry. It begins with a definition of the role of distribution channels in the tourism industry. The chapter then outlines the benefits of using marketing intermediaries (the middlemen who sell offerings within the tourism industry). Further, it explains the concepts of commission and horizontal integration. The chapter then focuses on the activities of key marketing intermediaries such as the tour operator, the travel agent, and the online travel retailer. Next, the various direct intermediaries such as the multimedia kiosks, video conferencing, virtual reality, and global distribution systems are discussed. This technology is changing the role of distribution channels in the industry. The chapter concludes with a discussion of the factors that influence the selection of an appropriate distribution channel. The chapter’s in-depth case study applies the principles of distribution (or place) to Reality Tours and Travel: Slum Tours , in Mumbai, India.

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George, R. (2021). Tourism Distribution. In: Marketing Tourism and Hospitality. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-64111-5_9

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