Learn here Difference Between Horizontal and Vertical Integration. Every business, regardless of size or type, need growth and expansion. The integration allows businesses to thrive and expand. Horizontal integration and vertical integration are the two main types of integration. Horizontal Integration is a corporate expansion strategy in which a corporation purchases the same business line or at the same value chain level to reduce competition to a more significant extent.
Vertical Integration, on the other hand, is utilized to dominate a whole industry by spanning the supply chain. It entails integrating multiple entities at various levels of the distribution chain.
So, read the following essay better to understand the distinctions between Horizontal and Vertical Integration.
What is Vertical Integration?
Vertical integration provides the organization with the key to industry domination. In this case, a corporation often purchases another company at a different supply chain stage but produces the same product. In other words, the corporation clears all middlemen or third parties in the product’s supply chain.
Vertical integration enables the organization to establish control of its suppliers, carriers, and manufacturers. This indicates that the corporation controls the product’s manufacturing and distribution. This allows the company to be self-sufficient. Vertical integration helps reduce production costs and waste.
There are two forms of vertical integration. They are called forward and backward integration, respectively. Forward integration is an upstream process of acquiring intermediaries in the next stage of the supply chain. In contrast, backward integration is a downstream process of developing intermediaries in the previous stage of the supply chain.
Consider the corporation “Z,” which manufactures potato chips. Z business intends to buy its raw materials supplier as part of vertical integration. If Z firm wants to acquire its distributors or logistics provider, Z company is pursuing Forward integration.
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What is Horizontal Integration?
Horizontal integration is a sort of merger that assists in market dominance. The union involves the combination of two firms that are both competitive. A corporation that wishes to expand its operations might use this horizontal integration strategy. Horizontal integration refers to a company’s intention to acquire firms that manufacture the same product line.
Horizontal integration contributes to the elimination of competitors and the establishment of a monopolistic market. It can sometimes result in an oligopoly market. Horizontal integration makes it possible to increase production levels and realize economies of scale. It allows the corporation to operate in many places. It aids in the diversification of its products or services and provides access to a vast consumer base.
Although horizontal integration has many benefits, it also has certain drawbacks. Horizontal integration has several downsides, including less flexibility, reduced value, and anti-trust law, which opens the door to legal challenges.
The goal of antitrust legislation is to protect consumers from substantial corporate enterprises’ dominance and to avoid monopolies, guaranteeing fair trading practices in the market. Horizontal integration also contributes to boosting the company’s market share. The merger of Facebook and Instagram is the finest example of horizontal integration.
Main Differences Between Vertical and Horizontal Integration
- Horizontal integration refers to a corporation purchasing the same business to gain market strength. In contrast, vertical integration refers to a comparable company dealing with the same product but at a different stage of the supply chain.
- Horizontal integration focuses on the market and becomes the primary provider of a product or service. Vertical integration focuses on the industry and enhances supply chain coordination by gaining control of other parties in the chain.
- Vertical integration is classified into two types: forward integration and backward integration. There is no such thing as horizontal integration.
- Vertical integration has a lower capital need than horizontal integration. Vertical integration aids in cost reduction.
- Vertical integration permits the company to be self-sufficient, but horizontal integration does not.
Horizontal Integration vs. Vertical Integration Examples
Horizontal Integration Examples
- Marriott and Starwood Hotels: In the interest of broadening its portfolio of properties, Marriott International (MAR) bought Starwood in 2016, establishing the world’s largest hotel corporation. While Marriott had a strong foothold in the luxury, convention, and resort markets, Starwood had a sizeable worldwide footprint. The combination provided customers with additional options, increased employment opportunities, and added value to stockholders. After the merger, the firms owned around 5,500 hotels and 1.1 million rooms globally.
- Anheuser-Busch InBev and SABMiller: The new business, Newbelco, was established in October 2016 with a valuation of $100 billion. Before the merger could be allowed, each company had to agree to sell off several of its popular beer brands, including Peroni, Grolsch, and the Czech Republic’s Pilsner Urquell, to comply with antitrust rules. One of the aims was to boost Anheuser-Busch InBev’s market share in growing nations such as China, South America, and Africa, where SABMiller already had a presence.
- Walt Disney Company and 21st Century Fox: In March 2019, Disney (DIS) completed its acquisition of 21st Century Fox. The objective was to broaden Disney’s content and entertainment offerings, expand worldwide, and develop its direct-to-consumer products, which included ESPN+, Disney+, and the two companies’ joint ownership investment in Hulu. Twentieth Century Fox, Fox Searchlight Pictures, Fox 2000 Pictures, Fox Family and Fox Animation, Twentieth Century Fox Television, FX Productions and Fox21, FX Networks, National Geographic Partners, Fox Networks Group International, Star India, and Fox’s interests in Hulu, Tata Sky, and Endemol Shine Group were also included in the deal.
Vertical Integration Examples
- Google and Motorola: In 2012, Alphabet’s Google (GOOG) purchased Motorola Mobility. Motorola invented the first cell phone and invested in Android technology, which benefited Google.
- Ikea and Forests in Romania: In 2015, the Swedish furniture giant purchased an 83,000-acre forest in northern Romania. IKEA bought the woodland to handle wood responsibly and affordably. It was the company’s first attempt at controlling its forest operations.
- Netflix Produces Its Content: Netflix (NFLX) is a prominent example of vertical integration in the entertainment business. Before launching its content studio, Netflix was at the tail end of the supply chain, distributing films and television series developed by others. However, firm officials understood that developing unique materials may yield more cash. The firm extended its original content offerings in 2013.
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Advantages and Disadvantages of Horizontal Integration vs. Vertical Integration
Horizontal Integration
While horizontal integration has several advantages, the most evident benefit is the more significant market share for the organization. When two firms merge, their goods, technology, and services to the market are also combined. A corporation’s expanding product line may also broaden its consumer base. Below are some more advantages of horizontal integration:
- A broader customer base.
- Increased revenue.
- We are eliminating the competition.
- More collaboration between the two firms (including marketing resources).
- Lowering production costs
Even though horizontal integration may make sense from a commercial viewpoint, there are drawbacks for the market, especially when it is successful. This technique is subject to intense government scrutiny, which is why antitrust laws exist.
Additionally:
- Merging two firms that operate in the same supply chain can restrict competition and reduce customer options.
- It may result in a monopoly in which one business controls the availability, prices, and supply of products and services.
- The new, more enormous corporation may exploit customers by rising prices and limiting product alternatives.
- Reduced flexibility, more bureaucracy, and increased transparency
- Failure is possible if there is no synergistic energy between the two firms.
Pros
- Economies of scales
- Increased market share
- Increased revenue
- Larger consumer base
- Reduced competition
- Reduced production costs
- Synergistic efforts
Cons
- Creation of a monopoly
- Deterioration of company value
- High level of scrutiny from government agencies
- Higher prices for consumers
- Fewer options for consumers
- Reduced flexibility for the new, larger company
Vertical Integration
Vertical integration helps a company:
- Reduce expenses at various stages of the manufacturing process.
- Increases quality control and ensures improved information flow and control across the supply chain.
- Increase your sales.
- Increase profits
- Reduce or reduce suppliers’ power over the firm (backward integration)
The drawbacks of vertical integration include:
- A concentration of resources in a single strategy
- Risk increases when market conditions are unpredictable.
- High expenses for strategy coordination, including the possibility of increased debt
Pros
- Better control over production volume
- Better flow and management of information across the supply chain
- Ensure tighter quality control
- Increase sales
- Reduce costs across various parts of the production
Cons
- Concentrates resources and prospects in one approach
- High organizational and coordination costs
- Increased risk during uncertain times
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Conclusion
Vertical and horizontal integration contribute to a firm’s growth in various ways. Simply expressed, vertical integration is acquiring another firm at a different level of the same supply chain. In contrast, horizontal integration is the ownership of an entirely different company that deals with the same product line. A firm must plan for its expansion and development regularly. To do so, the corporation must carefully weigh the benefits and cons of horizontal and vertical integration and select between them.
