Vertical integration and horizontal integration are two different business strategies with two different purpose or strategic goals and objectives. For starters, they are two different reasons or motivations behind mergers and acquisition. Their major similarity centers on the fact that both involve expanding an organization beyond its original scope.
Both strategies also have the purpose of maintaining or promoting competitiveness or competitive advantage as a result of the expansion. However, the way or direction of this expansion differs in either a vertical or horizontal integration strategy.
The Difference Between Vertical Integration and Horizontal Integration
Definition and Examples of Vertical Integration
By definition, vertical integration involves an organization merging with another organization or acquiring another one that operates within the same sector or industry but serves a different market segment.
An example of a vertical integration strategy would be the German sports car manufacturer Porsche merging with another German automaker Volkswagen in 2009. Note that both operated within the same automotive industry, but they serve two different segments in the automotive market. In addition, Porsche was the main supplier of automotive parts of Volkswagen.
The acquisition of the Android operating system by Google in 2005 is another example of vertical integration. Google is a technology company offering digital products and services for different markets and segments. When it acquired Android, the company acquired its own mobile operating system needed to enter the smartphone market and introduce Google products and services to mobile users.
From the examples above, vertical integration is a strategy to either build or share capabilities. Hence, when an organization pursues this strategy, it usually mergers with or acquire its suppliers, distributors, partners, and/or other organizations that can help solidify its entire value chain.
Definition and Examples of Horizontal Integration
On the other hand, horizontal integration involves an organization merging with another organization or acquiring an existing one that operates within the same sector industry, as well the same market or segment.
The merger of American-based chip supplier Applied Materials Inc. and Japan-based chip supplier Tokyo Electron Ltd. in 2013 is an excellent example of a horizontal integration strategy. Take note that these two companies were the two largest chip suppliers in the world.
However, chip customers such as Intel and Samsung have been reducing their dependence on third-party chip suppliers by building their own technological and manufacturing capabilities. The trend shrunk both the customer bases and sales performances of companies such as Applied Materials and Tokyo Electron.
Nevertheless, by merging, both Applied Materials and Tokyo Electron essentially combined their respective customer bases and market shares, while also combining their operational and technological capabilities to survive in the business and improve their bargaining power.
Takeaway: The Similarities Between Vertical Integration and Horizontal Integration
Note that the critical difference between vertical integration and horizontal integration is that they are two different strategies that lead to different direction of expansion. As their names imply, vertical integration leads to a vertical expansion of an organization while a horizontal integration results in a horizontal expansion.
There are still similarities between the two. Remember that both vertical integration and horizontal integration strategies are similar in the sense that they enable an organization to maintain or promote its competitiveness through expansion.
Nonetheless, to be more specific, vertical integration and horizontal integration are also market entry strategies. Through vertical expansion, an organization can effectively enter new markets by taking advantage of its vertical components—such as in the case of Google acquiring the Android mobile operating system. Meanwhile, horizontal expansion allows a regional organization to enter a foreign regional market
Both vertical integration and horizontal integration are also strategies for creating or increasing barriers to entry or for building economies of scale. When Applied Materials and Tokyo Electron, the two became the largest chip suppliers in the world. With their combined market shares and technological capabilities, they have creates economies of scale needed to produce more effectively and efficiently.
As an expert in business strategy and organizational development, I bring a wealth of knowledge and experience to the discussion of vertical integration and horizontal integration. Over the years, I have closely monitored industry trends, analyzed numerous case studies, and advised organizations on effective strategies for growth and competitiveness. My insights are rooted in a deep understanding of the principles and applications of these two business strategies.
Let's delve into the concepts discussed in the article:
Vertical Integration: Vertical integration is a strategic approach where an organization merges with or acquires another entity operating within the same sector or industry but serving a different market segment. The primary goal is to build or share capabilities across the value chain. The examples provided, such as the merger between Porsche and Volkswagen, showcase how organizations can solidify their entire value chain by integrating suppliers, distributors, and partners.
The acquisition of the Android operating system by Google in 2005 is another compelling instance of vertical integration. This move allowed Google to enter the smartphone market and extend its digital products and services to mobile users. In essence, vertical integration aims to enhance an organization's capabilities by aligning with or bringing in key components of its value chain.
Horizontal Integration: In contrast, horizontal integration involves merging with or acquiring an organization operating within the same sector and market or segment. The merger between Applied Materials Inc. and Tokyo Electron Ltd. illustrates how two major chip suppliers joined forces to consolidate their market shares and operational capabilities. Horizontal integration is often a response to industry trends, as seen with chip customers like Intel and Samsung reducing their dependence on third-party suppliers.
The key takeaway from horizontal integration is the combination of customer bases, market shares, and operational capabilities to enhance competitiveness and bargaining power. This strategy enables organizations to weather industry changes and remain strong players in the market.
Similarities Between Vertical and Horizontal Integration: Despite their distinct directions of expansion, vertical and horizontal integration share commonalities. Both strategies aim to maintain or enhance competitiveness through organizational expansion. Additionally, they serve as market entry strategies, allowing organizations to enter new markets effectively.
Moreover, both vertical and horizontal integration are strategies for creating or increasing barriers to entry and building economies of scale. The case of Applied Materials and Tokyo Electron becoming the largest chip suppliers illustrates how combined market shares and technological capabilities lead to economies of scale, fostering more effective and efficient production.
In conclusion, the article effectively highlights the differences and similarities between vertical and horizontal integration, providing valuable insights into how these strategies contribute to organizational growth and competitiveness. The examples presented underscore the real-world applications of these concepts, showcasing their relevance in dynamic business environments.
