Horizontal and Vertical Integration (Business Growth Strategy)
What is vertical integration?
When a company or business grows by acquiring another firm along its supply chain, this is known as vertical integration. The degree to which a business controls its upstream suppliers and distributors or downstream customers can also be used to describe this practice. The business that is acquired, for instance, might deal in raw materials that are used to produce their products or services or benefits that are obtained at the tail end of the supply chain. Vertical integrations can increase a company’s profits and give them immediate, direct access to their customers.
What is horizontal integration?
The process of horizontal integration occurs when a business decides to grow by acquiring another business in its sector. Another way for a business to achieve this type of integration is to merge with another business that has comparable or greater strength in order to increase their influence, revenue, and clientele. Companies frequently employ this strategy of business integration to improve their competitive position, increase production, and enter either a new or larger market.
For instance, if a clothing store wants to appeal to a larger market in its own country or even just the international market, it can merge with another clothing store to increase their overall customer base. As opposed to the revenue they would generate separately in the current market, the goal of a union like this would be to increase the money they would make after entering the new market.
12 differences between vertical and horizontal integration
The key distinctions between horizontal and vertical integration are as follows:
Operations
The process by which horizontal and vertical integration create their products is one of the main distinctions between the two. When two businesses that provide the same good or service are combined, they frequently use the same kinds of processes. This is known as horizontal integration. In vertical integration, businesses frequently carry on with their various stages of production.
Objective
Increased company or business size and production scale are the goals of horizontal integration. Contrarily, vertical integration aims to give a company complete or near-complete control over the supply chain, enhancing its production and distribution methods.
Types
Horizontal integration cannot be broken down into sub-categories. However, backward, forward, and balanced integration—which are defined below—can be divided into vertical integration:
Purpose
The functions that vertical and horizontal integration serve to a company vary. Vertical integration seeks to solve a company’s production and distribution issues while lowering production costs and reducing waste along the supply chain.
The main goal of horizontal integration is to subdue rivals or even take control of a competitor, business, or clientele. In order to increase profits, market shares, and benefit from the better economies of scale that come with mergers, businesses may also decide to adopt horizontal integration.
Self-sufficiency
When using vertical integration, a business can rely on itself for the production and distribution processes. However, because horizontal integration still depends on other businesses along the supply chain for its operations, this is not always the case.
Capital requirement
Since a company splits costs with its acquired or merged company, horizontal integration requires less capital to implement. Vertical integration, however, comes at a higher cost because the company must pay for all the costs associated with acquiring additional businesses along the supply chain.
Profit margin
A business that has integrated horizontally can boost its profit margins by removing rival competition. However, vertical integration allows a business to increase profit margins by cutting costs and waste.
Control
A company or business pursuing vertical integration seeks to dominate the entire sector. When a business uses horizontal integration, it frequently aims to dominate the market.
Leverage
Any company’s success along the supply chain benefits all other companies in the same chain when there is horizontal integration. When vertical integration occurs, on the other hand, a product’s success determines the profitability of every business along the supply chain.
Production scale
Due to the increased workforce and resources that come with combining companies, a business can increase its production scale through horizontal integration.
Focus
While a company focuses on acquiring the best components for its products during vertical integration, the horizontal integration process typically focuses on the production, operations, and supply chains.
Risk
Although both horizontal and vertical integration have advantages, a company that has integrated vertically may experience greater risks than a company that has integrated horizontally. This is so that a company can control all or most of the supply chain in vertical integration. All processes are impacted if a problem arises in one of the stages. Vertical integration, however, also gives a business a better chance to foresee and mitigate such risks.
FAQ
What is vertical integration with example?
Vertical integration aids in gaining control over the entire industry, as opposed to horizontal integration, which aids in gaining control over the market. Example of Horizontal Integration is the merger of Heinz and Kraft Foods.
What is an example of horizontal integration?
Vertical integration occurs when the chocolate manufacturer (e. g. Buying a cocoa bean processor that purchases its beans from Mondelez) As a result, the manufacturer can pay the processor exactly what it costs, rather than making a profit. As a result, consumers may notice lower prices in a market that is competitive.
