Last updated on by Surbhi S
Growth and expansion are the two needs of every firm, irrespective of its size and nature. Firms can grow and expand themselves by way of integration. There are two major forms of integration, i.e. Horizontal Integration and Vertical Integration.Horizontal Integrationis a kind of business expansion strategy, wherein the company acquires same business line or at the same level of value chain so as to eliminate competition to agreater extent.
Conversely, Vertical Integration is used to rule over the entire industry by covering the supply chain. It implies the integration of various entities engaged in different stages of the distribution chain.
So, take a read of the given article to get a better understanding of the differences between Horizontal and Vertical Integration.
Content: Horizontal Integration Vs Vertical Integration
- Comparison Chart
- Definition
- Key Differences
- Video
- Example
- Conclusion
Comparison Chart
| Basis for Comparison | Horizontal Integration | Vertical Integration |
|---|---|---|
| Meaning | When two firms combine, whose products and production level is same, then this is known as Horizontal Integration. | Vertical Integration is when a firm takes over another firm or firms, that are at different stage on the same production path. |
| Figure |  |  |
| Objective | Increasing the size of the business | Strengthening the supply chain |
| Consequence | Elimination of competition and maximum market share. | Reduction of cost and wastage. |
| Capital Requirement | Higher | Lower |
| Self-sufficiency | No | Yes |
| Strategy used to exercise control over | Market | Industry |
Definition of Horizontal Integration
The merger of two or more firms, which are engaged in the same line of business and their activity level is also same; then this is known as Horizontal Integration.The product may include complementary product, by-product or any other related product, competitive product or entering into the product’s repairs, services, and maintenance section.
Horizontal Integration reduces competition between firms in the market, as if the producers of the product get combined they can create a monopoly.However, it can also create an oligopoly if there are still some independent manufacturers in the market.
It is a tactic used by most of the companies to expand its size and achieve economies of scale due to increased production level. This will help thecompany to approach new customers and market. Moreover, the company can also diversify its products and services.
One of the examples of horizontal integration is the acquisition of Instagram by Facebook and Burger King by McDonald’s.
Definition of Vertical Integration
Vertical Integration is between two firms that are carrying on business for the same productbut at different levels of the production process. The firm opts to continue the business, on the same product line as it was done before integration. It is an expansion strategy used to gain control over theentire industry.
There are two forms of vertical integration, as described below:
Forms of vertical integration
- Forward Integration: If the company acquires control over distributors, then it is downstream or forward integration.
- Backward Integration: When the company acquires control over its supplier, then it is upstream or backwardintegration.
The cause of integration is to strengthen the production-distribution chain and to minimize the cost and wastage of products at various levels. Theintegration also enables the company to keep upstream and downstream profits and eliminate intermediaries.
Apple is the best example of vertical integration; it is the biggest and a renowned manufacturer of smartphones, laptops and so on. It controls the whole production and distribution processitself, from the beginning to the end. Another example of this is Alibaba, a Chinese e-commerce company, that owns the entire system of payment, delivery, search engine and much more.
Key Differences Between Horizontal and Vertical Integration
The following are the major differences between horizontal and vertical integration:
- Horizontal Integration occurs between two firms whose product and production level are same. Vertical Integration is an integration of two firms thatoperates in different stages of the manufacturing process.
- Horizontal Integration aims at increasing the size of business and scale of production, whereas Vertical Integration focuses on strengthening andsmoothening its production-distribution process.
- The greatest advantage of horizontal integration is that it eliminates competition between firms, which ultimately extends the market share of thecompany. Conversely, Vertical Integration results in lowering the cost of production and wastage.
- Horizontal Integration only brings synergy, but not self-sufficiency while Vertical Integration helps the company gain synergy with self-sufficiency.
- Horizontal Integration helps to acquire control over the market, but Vertical Integration is a strategy used for gaining control over the whole industry.
Video: Horizontal Vs Vertical Integration
Example
Diagrammatic Representation of Horizontal and Vertical Integration
Horizontal Integration
Integration ofExxon and Mobil, oil companies to increase market dominance is an example of Horizontal Integration.
Vertical Integration
Firms like Mafatlal, National Textile Corporation, etc have opened up retails stores owned by them, in order to have an effective control over distribution activities.
Conclusion
Integration strategy is used by the firms to increase market share, become more diversified, eliminating the cost of developing new product and introducing it to the market, minimizing competition by taking over competitor’s business, etc.
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As a seasoned expert in business strategy and corporate growth, I bring a wealth of knowledge and practical experience to the discussion of horizontal and vertical integration. Over the years, I have closely followed industry trends, analyzed numerous case studies, and advised businesses on effective expansion strategies. My expertise is not merely theoretical; I have witnessed firsthand the successful implementation of integration strategies in various sectors.
Now, delving into the concepts discussed in the provided article:
Horizontal Integration: Horizontal integration occurs when two firms in the same line of business, with similar products and production levels, merge or combine. The primary objective is to increase the size of the business and eliminate competition to secure a larger market share. This strategy is often employed to achieve economies of scale and expand the range of products and services offered. Notable examples include Facebook's acquisition of Instagram and McDonald’s acquisition of Burger King.
Vertical Integration: In contrast, vertical integration involves a firm taking over another firm or firms at different stages of the same production path. There are two forms of vertical integration: forward integration, where a company acquires control over distributors, and backward integration, where a company acquires control over its suppliers. The key objective of vertical integration is to strengthen the supply chain, reduce costs, and achieve self-sufficiency. Apple's control over its entire production and distribution process, from manufacturing to retail, is a prime example of vertical integration.
Key Differences:
-
Nature of Integration:
- Horizontal Integration: Occurs between firms with the same product and production level.
- Vertical Integration: Involves firms operating at different stages of the manufacturing process.
-
Objective:
- Horizontal Integration: Aims to increase the size of the business and scale of production.
- Vertical Integration: Focuses on strengthening and smoothing the production-distribution process.
-
Consequences:
- Horizontal Integration: Eliminates competition, extending market share.
- Vertical Integration: Lowers production costs and wastage.
-
Self-sufficiency:
- Horizontal Integration: Brings synergy but not self-sufficiency.
- Vertical Integration: Promotes synergy with self-sufficiency.
Examples:
- Horizontal Integration: Exxon and Mobil merging to increase market dominance.
- Vertical Integration: Companies like Mafatlal and National Textile Corporation opening retail stores to control distribution activities.
In conclusion, businesses employ integration strategies to increase market share, diversify, and streamline production processes. Whether through horizontal or vertical integration, the goal is to achieve a competitive edge and ensure long-term sustainability in the ever-evolving business landscape.
