Horizontal Integration vs. Vertical Integration: An Overview
Horizontal integration and vertical integration are growth strategies that companies use to consolidate their positions and set themselves apart from their competitors. Both involve the acquisition of other businesses. While either strategy can help companies expand, there are important differences between the two.
In horizontal integration, a business grows by purchasing related businesses—namely, its competitors. In vertical integration, on the other hand, a business acquires another company in order to give it greater control over the stages in its supply or distribution chain.
Key Takeaways
- Horizontal integration is a business strategy where one company takes over another that operates at the same levelin an industry.
- Vertical integration involves the acquisition of business operations within the same production vertical.
- Horizontal integrations help companies expand in size, diversify their product offerings, reduce competition, and expand into new markets.
- Vertical integrations can help boost profits and make companies less dependent on their suppliers or distributors.
How Horizontal Integration Works
Horizontal integration is a growth strategy that many companies use to boost their position within their industries and get an edge on their competition. They do this by taking over another company that operates at the same level of thevalue chain. This means both companies offer similar (if not the same) goods and services, and deal with a similar customer base.
For example, if a department store chain wants to expand its footprint, buying another chain in a different city, state, or country is one way to go about it. Doing so would provide the purchaser with more revenue and allow it to reach a wider market.
Horizontal integration also allows companies to cut down on their costs by sharing technology, marketing efforts, , production, and distribution. So, ideally, the expanded department store chain would be more profitable than the two chains were when they operated separately.
Horizontal integration usually works best when two companies have synergistic cultures. The process may fail if there are problems when the two cultures merge.
How Vertical Integration Works
Vertical integrationis a strategy that involves growth through the acquisition of a producer, vendor, supplier, distributor, or other related company that the acquirer may already be doing business with. Companies that choose to integrate vertically do so to strengthen their supply chain, reducetheir production costs, capture upstream or downstream profits, or access newdistribution channels.
There are two basic types of vertical integration:
- Backward integration occurs when a company decides to buy another business that makes an input product for the acquiring company's product. For example, a car manufacturer pursues backward integration when it acquires a tire manufacturer.
- Forward integration occurs when a company decides to take control of some aspect of the post-production process. So, that car manufacturer might acquire an automotive dealership to sell the vehicles it produces. This gets the manufacturer closer to the consumer and also provides it with additional revenue.
Note
In addition to acquisitions and mergers, companies can achieve the goals of vertical integration through internal expansion.
Advantages and Disadvantages of Horizontal Integration vs. Vertical Integration
Both horizontal and vertical integration have their pros and cons.
Horizontal integration: pros and cons
While there can be many benefits to horizontal integration, the primary ones include:
- Access to a larger customer base
- Greater revenue
- Reduced costs through economies of scale
- Taking a competitor off the playing field
Even though a horizontal integration may make sense from a business standpoint, however, there are potential downsides for consumers. For that reason, this strategy can face a high level of scrutiny from government regulators, who may invoke antitrust laws to stop it from happening.
Specifically:
- Merging two companies in the same industry cut downs on competition and can reduce the choices available to consumers.
- It may lead to a monopoly where one company controls the availability, prices, and supply of products and services.
- The new, larger company may take advantage of its dominance by raising prices and narrowing product options.
In addition to those potential obstacles, creating a larger company may result in increased bureaucracy and reduced flexibility. There is also a significant chance of failure if there isn't synergistic energy between the two companies and their cultures clash.
Cons
High level of scrutiny from government agencies
Potential creation of a monopoly
Possibility of higher prices and fewer options for consumers
New company may be more bureaucratic, less nimble
Vertical integration: pros and cons
Vertical integration can help a company:
- Reduce costs across different stages of its production process
- Maintain tighter quality control and a better flow of information across thesupply chain
- Increase sales
- Improve profits
- Reduce or eliminate the leverage that certain suppliers have over the company (backward integration)
The drawbacks of vertical integration include:
- A concentration of resources in one approach
- Increased risk when market environments are uncertain
- High costs to coordinate the strategy, including the potential of additional debt
Pros
Increased sales
Reduced costs across various parts of production
Tighter quality control
Better flow of information across the supply chain
More control over production volume
Cons
Concentration of resources in one approach
Increased risk during uncertain times
Potentially high organizational and coordination costs
Horizontal Integration Examples
- Marriott and Starwood Hotels. Marriott International (MAR) acquired Starwood in 2016, creating the world's largest hotel company. While Marriott already had a solid presence in the luxury, convention, and resort segments, Starwood's international presence was very strong. The merger offered greater choice for consumers, more opportunities for employees, and added value for shareholders. The combined companies had approximately 5,500 hotels and 1.1 million rooms worldwide after the merger was completed.
- Anheuser-Busch InBev and SABMiller. Finalized in October 2016 with a valuation of $100 billion, the new company now trades under the name Newbelco. Each company had to agree to sell off many of its popular beer brands, such as Peroni and Grolsch, in order to comply with antitrust laws before the merger was approved. One of the goals was to increase Anheuser-Busch InBev's market share in developing regions of the world, such as China, South America, and Africa, where SABMiller already had established access to those markets.
- Walt Disney Company and 21st Century Fox. Disney's (DIS) acquisition of 21st Century Fox was finalized in March 2019. The goal was to increase Disney's content and entertainment options, expand internationally, and grow its direct-to-consumer offerings, including ESPN+, Disney+, and the two company's combined ownership stake in Hulu. The deal also included Twentieth Century Fox, Fox Searchlight Pictures, Fox 2000 Pictures, Fox Family and Fox Animation, Twentieth Century Fox Television, FX Productions and Fox21, FX Networks, National Geographic Partners, Fox Networks Group International, Star India, and Fox’s interests in Hulu, Tata Sky, and Endemol Shine Group.
Vertical Integration Examples
- Google and Motorola. Alphabet's Google (GOOG) acquired Motorola Mobility in 2012. Motorola had created the first cell phone and invested in Android technology that was valuable for Google.
- Ikea and forests in Romania. The Swedish furniture giant bought an 83,000 acre woodland in northeastern Romania in 2015. It was the first effort the company made at managing its own forest operations. IKEA said it purchased the forest in order to manage wood sustainably at affordable prices.
- Netflix produces its own content. Netflix (NFLX) is one of the most significant examples of vertical integration in the entertainment industry. Prior to starting its own content studio, Netflix was at the end of the supply chain because it distributed films and television shows created by other companies. But Netflix realized it could generate more revenue and be less dependent on others if it were to create its own programming. In 2013, the company released its first original content in the form of four new series.
What Is the Basic Difference Between Horizontal and Vertical Integration?
Horizontal integration is an expansion strategy that involves the acquisition of another company in the same business line. Vertical integration is an expansion strategy where a company takes control over one or more stages in the production or distribution of its products.
Why Are Horizontal and Vertical Integration Important?
Both horizontal and vertical integration can give a company a competitive edge in the marketplace through strategic acquisitions. The same company can implement both strategies at different times, depending on what its goals are at any particular point. Acquiring another company can also be faster and cheaper than developing similar resources internally.
What Is an Example of Horizontal Integration?
An example of horizontal integration would be if two consulting firms merge. One of the firms offers software development services in the defense industry; the other firm also provides software development but in the oil and gas industry. The new company can now do both.
Who Uses Vertical Integration?
Companies that seek to strengthen their positions in the market and gain greater control over their production or distribution chains use vertical integration.
The Bottom Line
Horizontal integration and vertical integration are two different growth strategies that can help companies expand their business. Although the ultimate goals may be the same, there are important differences between the two strategies. Horizontal and vertical integration also have potential downsides that companies need to consider before embarking on either of them.
FAQs
Horizontal integration is an expansion strategy that involves the acquisition of another company in the same business line. Vertical integration is an expansion strategy where a company takes control over one or more stages in the production or distribution of its products.
What is the difference between vertical integration and horizontal integration? ›
Horizontal integration is when a business grows by acquiring a similar company in their industry at the same point of the supply chain. Vertical integration is when a business expands by acquiring another company that operates before or after them in the supply chain.
What are the major differences between horizontal and vertical integration provide an example to best explain your answer? ›
Horizontal integration helps acquire control over the market, but vertical integration helps gain control over the whole industry. Example: The Heinz and Kraft Foods merger is an example of horizontal integration.
What is the difference between vertical and horizontal approach? ›
The horizontal approach is organization centric. It measures total impact across an organization. The vertical approach is product centric. It looks all the way up and down a product's supply chain and measures the total impact of the product through its lifecycle.
What are the characteristics of vertical and horizontal integration? ›
Horizontal integration often entails similar companies coming together, while vertical integration often entails different companies related to a similar product coming together. The ultimate goal of vertical integration is to become independent of suppliers and control more aspects of the supply chain.
What are two 2 differences between horizontal integration and vertical integration? ›
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.
How do you compare horizontal and vertical integration quizlet? ›
What is the difference between vertical and horizontal integration? Vertical integration occurs when a company owns all parts of the industrial process. Horizontal integration occurs when a company grows by buying its competitors.
What is the difference between horizontal and vertical integration education? ›
The authors describe horizontal integration as the “integration across disciplines but within a finite period of time” [3], usually referring to the basic sciences. Vertical integration (VI) means integration across time.
What are the pros and cons of horizontal integration? ›
The advantages include increasing market share, reducing competition, and creating economies of scale. Disadvantages include regulatory scrutiny, less flexibility, and the potential to destroy value rather than create it.
What is the difference between vertical and horizontal growth strategy? ›
Horizontal growth is basically expansion into adjacent markets. Like Amazon beginning to sell electronics after providing themselves successful at selling books. Whereas vertical growth is further expansion along the supply chain.
What are the determinants of Vertical Integration in Business?
- Possible Savings Resulting from Coordination. ...
- Flexibility. ...
- Elimination of Marketing Expenditure. ...
- Effects of Patents. ...
- Volume Required for Economic Production. ...
- Financial Status of the Company.
Here are several examples of horizontal integration:
- Two manufacturers of electric engines merge. One entity produces engines for cars, while the other entity produces engines for trucks.
- Two manufacturers of retail homes merge. ...
- Two consulting firms merge.
Vertical integration involves acquiring or developing one or more important parts of a company's production process or supply chain. For example, Netflix's shift from licensing shows and movies from major studios to producing its own original content is an example of vertical integration.
What is the difference between horizontal integration and horizontal merger? ›
Horizontal Integration occurs from mergers among companies directly competing in the same or closely adjacent markets. The companies involved in a horizontal merger are normally close competitors that provide goods or services at the same level in the overall value chain.
What is the difference between vertical integration and vertical merger? ›
Vertical Merger vs.
2 For example, with vertical integration, a ladder manufacturing company could decide to produce its own aluminum for the end product instead of purchasing it from suppliers. A vertical merger, on the other hand, would result in the manufacturing company and the supplier merging.
What are the advantages of vertical integration? ›
A vertical integration strategy can deliver advantages, including greater economies of scale, lower variable production costs, decreased logistics costs and quality concerns and — yes — increased profitability.
What are horizontal and vertical integration theories? ›
Vertical integration is the practice of acquiring different pieces along a supply chain that a company does not currently manage. Horizontal integration is the practice of acquiring similar companies to further master what it already does.
What are 3 disadvantages of vertical integration? ›
Risks in Vertical Integration
- Established distribution channels may be adversely affected.
- Unprofitable outcome.
- Obsolescence due to new technologies.
- Higher cost due to lower volume.
- Unforeseen labor issues.
- Lack of continued focus on the original business.
- If acquisition is a commodity, not having lowest costs.
Disadvantages of vertical integration
- Vertical mergers will have fewer economies of scale because production is at different stages of supply.
- Mergers can often create new problems of communication and coordination within the bigger more disparate firm.
Disadvantages of horizontal communication
- It can be chaotic if not carefully managed.
- It can be time-consuming.
- There can be a conflict between employees due to a loosely-defined hierarchical structure.
Vertical integration also allows for less flexibility, so it is difficult to reverse. In the end, you may end up losing money on your investment, and too often an acquisition mistake cannot be made profitable by working harder.
What is the difference between vertical and integration? ›
In horizontal integration, a business grows by purchasing related businesses—namely, its competitors. In vertical integration, on the other hand, a business acquires another company in order to give it greater control over the stages in its supply or distribution chain.
What are the key elements of integration? ›
5 Elements to Include When Crafting an Integration Strategy
- Application/ System Integration.
- Data Integration (including data formats and data quality)
- Business Process Integration.
- Cloud Integrations.
- Security.
The internet thrives through the superior network technologies that enable it. This, in turn, enables platforms – or what Ben Thompson calls aggregators – with potentially global reach. Google, Facebook (and ad networks), Amazon, Netflix, Uber and Airbnb are all examples of this kind of horizontal integration.
How does horizontal integration work? ›
Horizontal integration happens when one firm acquires another firm operating in the same industry or producing the same line of products. Companies that engage in horizontal integration may realize economies of scale, reduced production costs, synergy in marketing, increased revenue, among others.
What are the reasons for horizontal integration? ›
Key takeaways:
- Horizontal integration organizes multiple companies within one company structure that focuses on the same goal: the consolidation of company assets, production, process and employees.
- Horizontal integration can help companies expand their market and products and reduce competition.
There are three varieties of vertical integration: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (both upstream and downstream) vertical integration.
Is Netflix an example of vertical integration? ›
For companies like Apple, Netflix, Tesla, Ikea, Allbirds, and Peloton, vertical integration has proven to be a key driver of superior company performance, while also building barriers to competition.
Why McDonald's is example of vertical integration? ›
McDonald's has been studied intensively in supply chain management courses and has vertically integrated its supply chain since the early 1990s. By owning more supply chain elements, McDonald's has more control over its product quality and cost. By owning livestock farms, McDonald's can better control its beef patties.
What is an example of vertical integration? ›
In economics, vertical integration is the term used to describe a business strategy in which a company takes ownership of two or more key stages of its supply chain. A vertically integrated automaker, for example, might produce automobile components and vehicles and also sell directly to customers.
Facebook and Instagram. One of the most definitive examples of horizontal integration was the acquisition of Instagram by Facebook (now Meta) in 2012 for a reported $1 billion. 1 Both companies operated in the same industry (social media) and shared similar production stages in their photo-sharing services.
What is horizontal integration in simple terms? ›
Horizontal integration is an expansion strategy that involves the acquisition of another company in the same business line. Vertical integration is an expansion strategy where a company takes control over one or more stages in the production or distribution of its products.
How do you explain vertical integration? ›
Vertical integration is the business arrangement in which a company controls different stages along the supply chain. Instead of relying on external suppliers, the company strives to bring processes in-house to have better control over the production process.
Is Starbucks horizontal integration? ›
Starbucks uses both forward and backward vertical integration to maximize profits. By maintaining direct relationships with coffee growers and owning their equipment, storage, and roasting facilities, Starbucks can control its entire manufacturing process.
What was the first example of vertical integration? ›
Vertical Integration was first used in business practice when Andrew Carnegie used this practice to dominate the steel market with his company Carnegie Steel. It allowed him to cut prices and exhuberate his dominance in the market. Currently, this is considered a vertical monopoly and is illegal as an entity.
Is Apple an example of vertical integration? ›
Apple Inc. has employed a vertical integration strategy for decades. Its software products are placed into electronic devices and computer systems manufactured and assembled by Apple using hardware and components also manufactured by the company.
Why is horizontal integration important? ›
Horizontal integration organizes multiple companies within one company structure that focuses on the same goal: the consolidation of company assets, production, process and employees. Horizontal integration can help companies expand their market and products and reduce competition.
What companies use horizontal integration? ›
What is an example of horizontal integration? Two of the biggest oil and gas companies – Exxon and Mobil – merged in 1998, in a deal worth over $75 billion. The resulting company, ExxonMobil, is now the third largest company in the world and revenues of over $280 billion.
