When a firm chooses to become more vertically integrated, it is choosing to take on activities that might otherwise have been covered by a market transaction in which it acted as either customer or supplier. This is in direct contrast to the process of diversification, which involves the addition of activities which were previously outside the firm's areas of direct interest and influence, although the activities may have been related as substitutes or complements in the eyes of consumers.

There are many possible motives for integration, and any attempt to classify these motives may involve some ambiguity. Nevertheless it is often fruitful to recognize at least two broad alternatives. First, integration may be undertaken consciously to reduce the costs of manufacturing or distributing existing items. Second, integration may be undertaken for longer-term strategic reasons, to improve the general competitive position and to reduce the risks faced by the firm. However, almost as a third category, we should note that, in some cases, it may be difficult or impossible for a firm to develop at all unless it does so as an integrated unit, because the existing sources of supply are inadequate and cannot develop quickly enough to offer a realistic alternative.

For example, in the early stages of development of the motorcar industry in the United Kingdom, the domestic light-engineering industry was unable to provide satisfactory component supplies, and car manufacturers had to provide capital and know-how to manufacture their own components.