Horizontal vs Vertical Integration

Article byMelvin Sewak
Reviewed byDheeraj Vaidya, CFA, FRM

Differences Between Horizontal and Vertical Integration

Horizontal integration refers to the expansion strategy adopted by the corporations, which involves acquiring one company from another company where both the companies are in the same business line and at the same value chain supply level. Conversely, vertical integration refers to the expansion strategy adopted by the corporations. One company acquires another company at different levels, usually at the lower level of its value chain supply process.

When a business kicks off into the market, it aims to grow its customer base and its capacity to deliver the best of its products and services to the customers. But easier said than done, this has never been a sprint but a marathon.

Such expansions in the business world require a lot of resources in terms of finances, human capital, and, most importantly, a business expansion strategy. As a result, companies employ many strategies to establish their place amongst their peers in the market. Still, one can group them into two at a high level, namely horizontal and vertical integration.

What is Horizontal Integration?

Horizontal integration is a business expansion strategy that involves a company acquiring other companies from the same business line or at the same value chain level to subside competition.

Explanation

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What is Vertical Integration?

Vertical integrationVertical IntegrationVertical integration is a corporate approach to take charge of its value chain or supply chain functions. It is the process of holding and managing the distributors, suppliers and retail locations at the company's discretion.read more is a business expansion strategy comprising a company acquiring various entities engaged in different value chainValue ChainValue chain (VC) refers to the sequence of activities and processes a business undertakes to add value to its product or service at every stage from its inception to delivery.read more stages.

Integration Stage

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Horizontal vs. Vertical Integration Infographics

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Key Differences

Comparative Table

Basis for ComparisonHorizontal IntegrationVertical Integration
Merger DirectionFirm A Firm B Firm CFirm A
Firm B
Firm C
DesignThe merging firms have the same/similar operational activities regarding products.The merging firms operate at different levels of the value chain.
ObjectiveIt aims to increase the size of the business.It aims to strengthen the supply chain.
ResultIt results in the elimination of competition and maximizes market share.It results in the reduction of cost and wastage.
ControlThe strategy helps in gaining control over the market.The plan is useful to gain control over the industry.

Application of Horizontal and Vertical Integration

The firms mainly use integration strategy to:

  • Minimize competition by taking over competitors
  • Increase their market shares
  • Become more diversified in operational presence
  • Eliminate the cost of developing and making a new product available.

Horizontal integration can prove to be a successful strategy when: –

  • Competitors are not in the capacity to go for head-on competition for long due to the limitation of resources at their disposal.
  • A company is competing in a growing industry.
  • Economies of scale or monopoly are beneficial for all the business stakeholders.

Though horizontal integration, as explained above, may appear to be a promising strategy, it may not work in all situations. It depends on the company’s value proposition and its resources and capabilities. The model provides a great recipe for success and leverage but is limited to factors such as the synergySynergySynergy is a strategy where individuals or entities combine their efforts and resources to accomplish more collectively than they could individually.read more created through horizontal integration to promote the products and services at the new scaled-up production levels and depends on the company’s place in the entire value chain.

Vertical integration helps a company in: –

But vertical integrations may also cause: –

Conclusion

Choosing between these inorganic strategies must involve considering short-term and long-term growth objectives. While horizontal and vertical integration mergers represent significant benefits, a company must remember that such a transaction is only successful if the new company integrates strategically and seamlessly. So, the merger should create some value in terms of synergy, market leadership, or cost leadership, which could then be translated into profits, promising a long-term customer base and a sustainable business environment.

Whether to employ horizontal or vertical integration has a long-term influence on a company’s business strategy.

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