Horizontal integration and vertical integration refer to two strategies that are used by companies to expand their business and strengthen their position in the market or industry in which they are operating. Horizontal integration is the business strategy used by companies to acquire other companies at the same business level, with the intention of strengthening their position in the market by eliminating competition. Vertical integration, on the other hand, is the business strategy whereby a company seeks to have complete authority over the production processes or distribution channels of a product by acquiring other companies in distinct stages of the value chain. In this article, we will discuss the two forms of integration in detail and elaborate on the differences between the two.
Definitions and explanations
Horizontal integration takes place when a company grows by merging with or acquiring a similar or a competitive company in the same business. When horizontal integration is successful, it is able to generate a greater amount of revenue, in comparison to if the companies were to perform operations independently. Furthermore, the merger of the two companies leads to a decrease in costs as the expenses pertinent to marketing, technology, production, research and development and distribution are divided between the two companies. The acquisition of Whatsapp by Facebook is a key example of horizontal integration.
Horizontal integration causes a decrease in competition, because of which a monopoly emerges in the market. In addition, it allows companies to diversify their products and services, enabling it to offer a greater amount of product features to its customers. The production levels increase, because of which its operational size increases, while the costs it incurs decreases. Hence, it manages to achieve economies of scale. Horizontal integration also allows companies to expand their customer base and enter new markets, including those in other countries. For instance, a food chain may merge with a similar chain in a foreign country so that they can commence operations there.
In vertical integration, the various stage of production or the distinct functional areas of the production process are acquired by the company with the objective of gaining full control over the whole industry. This eliminates the profitability from the various channels, leading to an increase in the profit margin.
Vertical integration is carried out by a company to make sure that it has complete control on the entire production process, starting from supply of raw materials to manufacturing the products. In addition, a company may also acquire the distribution channels so that it has control over the distribution of its products.
Vertical integration is of two types, forward integration and backward integration. In forward integration, the distribution channels that transfer its products to the consumers are taken over by company, whereas in backward integration, a company acquires those units that provide raw materials to it. For example, a car manufacturing company may acquire factories that make tyre and other electrical parts (backward integration), or it may set up its showrooms for directly selling its automobiles or offer after-sales service (forward integration).
There are several advantages of vertical integration for companies.The strategy ensures that the company acquires greater profits from the companies it recently acquired as it is now able to sell products to customers directly. In addition, it makes the supply chain of the company smoother by making sure that the raw materials and components are provided in a timely manner with the required specifications. In addition, it ensures that the production process becomes more efficient and eliminates delays in transportation and delivery of products. It also increases the efficiency of the distribution and after-sales service of the company. Furthermore, through vertical integration, companies are able to acquire their own supply and distribution channels, which decreases costs and makes it difficult for new players to enter the market.
Differences between horizontal integration and vertical integration
Horizontal integration and vertical integration can be distinguished from each other in the following ways:
Those companies that are at the same level of production are merged with one another in horizontal integration. However, in, vertical integration two companies that are at different levels of production are integrated with one another.
Horizontal integration is carried out to increase the scale of operation and the size of the business, while vertical integration has the objective of making the production-distribution cycle smoother and stronger.
Horizontal integration removes competition from the market, and increases the market share of the company, while a decrease in cost and waste are the outcomes of vertical integration.
In horizontal integration, the company is able to gain control of the market, whereas in vertical integration, the company is able to acquire control of the entire industry.
When a company undergoes horizontal integration, it does not become self-sufficient because it still needs different functional departments to ensure smooth operations. However, vertical integration makes a firm self-sufficient as it has acquired more than one functional level of the business.
Horizontal integration vs vertical integration – tabular comparison
A tabular comparison of horizontal integration and vertical integration is shown below:
|An integration of two companies that are working at the same business level||An integration of companies that are operating at distinct business levels|
|Increasing the size of the business||Making the supply chain stronger|
|Increase in market share as competition has decreased||Decrease in cost and waste|
|Gains control of the market||Gains control of the whole industry|
|Does not become self-sufficient||Becomes self-sufficient|
Conclusion – horizontal integration and vertical integration:
A very important part is played by horizontal integration as well as vertical integration in expanding the business operations of a company. Horizontal integration helps companies in achieving a greater share of the market, whereas vertical integration helps in enhancing operational efficiency and enhancing profit margins. While determining which strategy to choose, the company should take into account their objectives for short-term as well as long-term growth.