Differences Between Horizontal and Vertical Integration
Horizontal integration refers to the expansion strategy adopted by the corporations which involves acquisition of one company by another company where both the companies are in the same business line and at same value chain supply level, whereas, Vertical integration refers to the expansion strategy adopted by the corporations where one company acquire another company who is at the different level, usually at the lower level of its value chain supply process.
When a business kicks off into the market, it aims at growing its customer base, and also it’s 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. There are many strategies that companies employ in order to establish their place amongst its peers in the market, but at a high level, they can be grouped into two, namely Horizontal and Vertical Integration.
What is Horizontal Integration?
Horizontal Integration is a type of business expansion strategy, which comprises a company acquiring other companies from the same business line or at the same level of the value chain so as to subside competition.
- Due to lesser competition, there operates an environment of consolidation and monopoly in the industry. However, it can also create an oligopoly if there are still some independent players in the market.
- The company can also diversify its products and services. When a company expands using horizontal integration, it achieves growth in its operational size and economies of scale due to increased production level.
- This helps the company in spanning its reach to a larger customer base and market. Horizontal Integration often raises antitrust concerns, as the combined firm will have a larger market share than either firm did before merging.
- Some recent examples to quote such a strategy in action would be Walt Disney Company’s $7.4 billion acquisition of Pixar Animation Studios in 2006.
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. is a type of business expansion strategy, which comprises a company acquiring various entities engaged in different stages of the value chain.
- In Vertical Integration, two firms that are doing business for the same product but are currently at different levels of the supply chain process merge into the single entity, which opts to continue the business on the same product line Product LineProduct Line refers to the collection of related products that are marketed under a single brand, which may be the flagship brand for the concerned company. Typically, companies extend their product offerings by adding new variants to the existing products with the expectation that the existing consumers will buy products from the brands that they are already purchasing. as it was doing before integration.
- Vertical Integration is an expansion strategy used to gain control over the entire industry. There are mainly two forms of Vertical Integration, namely, Forward IntegrationForward IntegrationForward integration is a strategic approach where the companies move ahead in the supply chain and take over the distribution and retail activities. The purpose of this vertical integration is to achieve cost efficiency. and Backward IntegrationBackward IntegrationBackward Integration is a vertical integration type in which a Company buys or integrates with its supplier firms to improve efficacy, save costs, & gain more control over the production process..
- A merger situation where the company acquires control over its distributors, then it is referred to as downstream or forward integration, whereas when the company acquires control over its supplier, then it is upstream or backward integration.
Horizontal vs. Vertical Integration Infographics
- Horizontal Integration occurs between two firms that are similar in operations, in terms of product and production level, whereas in Vertical Integration, the two firms to be merged operate at different stages of the supply chain.
- Horizontal Integration brings synergy but not self-sufficiency to operate independently in the value chain, while Vertical Integration helps the company gain synergy with self-sufficiency.
- Horizontal Integration helps to acquire control over the market, but Vertical Integration helps in gaining control over the whole industry.
- Heinz and Kraft Foods merger is an example of Horizontal IntegrationExample Of Horizontal IntegrationHorizontal Integration is a merger that takes place between two companies operating in the same industry. These companies are usually competitors and merge to gain higher market power and economies of scale, an extensive customer base, higher pricing power, and lower employment cost. as both of them produce processed food for the consumer market.
- A store like Target, which has its own store brands, is an example of Vertical Integration. It owns the manufacturing, controls the distribution, and is the retailer, offering products at a much lower price by cutting out the middleman.
|Basis for Comparison||Horizontal Integration||Vertical Integration|
|Merger Direction||Firm A Firm B Firm C||Firm A |
|Design||The merging firms have the same or similar operational activitiesOperational ActivitiesOperating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production. in terms of product||The merging firms operate at different levels of the value chain|
|Objective||It aims to increase the size of the business||It aims to strengthen the supply chain|
|Result||It results in the elimination of competition and maximizes market share||It results in the reduction of cost and wastage|
|Control||The strategy helps in gaining control over the market||The strategy is useful to gain control over the industry|
Application of Horizontal and Vertical Integration
Integration strategy is mainly used by the firms to:
- minimize competition by taking over competitors
- increase their market shares
- become more diversified in operational presence
- eliminate the cost of developing a new product and making it available to the market
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 situation are beneficial for all the stakeholders of the business
Though the 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 as well as its resources and capabilities. The model provides a great recipe for success and leverage but is limited to factors such as the synergy created through the Horizontal Integration to promote the products and services at the new scaled-up production levels and also depends on the place that the company holds in the entire value chain.
Vertical Integration helps a company in:
- increasing entry barriers for new entrants
- absorbing both upstream and downstream profits
- smoothening the supply chain
But Vertical Integrations may also cause:
- fall in the quality of good due to lack of competition
- companies to focus less on their core competencies and more on newly acquired businesses
- reduction in flexibility to increase or decrease production levels
The decision to choose between these different inorganic strategies must involve considering both short-term and long-term growth objectives. While both horizontal and vertical integration mergers represent significant benefits, a company must remember that such a transaction is only successful if the new company is integrated strategically and seamlessly. So, the merger should create some value in terms of synergy, market leadership, or cost leadership, which could then straightaway be translated into profits, promising long-term customer base and a sustainable business environment.
The decision of whether to employ horizontal and vertical integration has a long-term influence on the business strategy of a company.
This article has been a guide to horizontal integration vs. vertical integration. Here we discuss the top differences between horizontal and vertical integration along with infographics and a comparison table. You may also have a look at the following articles –