An essential element for a business is to grow, so it’s important for a company to plan growth strategies regularly.
Integration plays a key factor when it comes to a company to decide between acquiring another company (preferably a smaller one) or strengthening its overall supply chain in order to grow and expand. Integration is divided into two,
namely Vertical Integration and Horizontal Integration.
- Vertical integration involves merging different stages of production or distribution of a product under one company, while horizontal integration involves merging companies in the same industry or level of production.
- Vertical integration provides more control over the supply chain, while horizontal integration allows for market dominance and increased economies of scale.
- Vertical integration is more common in industries such as oil, while horizontal integration is more common in industries such as technology.
Vertical Integration vs Horizontal Integration
Vertical integration refers to a company’s strategy of owning or controlling the entire supply chain, from raw materials to the end product. Horizontal integration refers to a company’s strategy of acquiring or merging with other companies at the same stage of production or in the same industry.
Vertical integration is used when a company tries to get control over the entire industry. Under Vertical integration, a company tries to acquire another company that operates in the same supply chain (for example, its raw material supplier or transporter).
Vertical integration can benefit the company in terms of cost and production and speeds up the production process.
Horizontal integration helps the company to gain control over the market. In Horizontal integration, a company tries to acquire its opponent company or a company that operates in the same product line.
This helps with eliminating the competitors and paves the way for becoming the monopolist and achieving economies of scale.
|Parameters of Comparison||Vertical Integration||Horizontal Integration|
|Meaning||Under Vertical integration, the company acquires its suppliers and distributors for speeding up the supply chain.||Under Horizontal integration, the company merges with a different company that supplies the same product or service so as to eliminate its competitors and gain market control.|
|Capital||It requires high capital.||It requires comparatively low capital.|
|Purpose||To become cost-effective and prevent wastage.||To gain market control and establish a monopoly kind of market.|
|Control||To gain control over industry.||To gain control over the market.|
|Example||The best example for Vertical integration is Apple Inc.||Facebook and Instagram merger is one best example of Horizontal integration.|
What is Vertical Integration?
Vertical integration gives the company the key to control the industry. Here, a company tends to acquire another company that is in the different stages of the supply chain but is involved in producing the same product.
In other words, the company clears all the intermediaries or third parties in the supply chain of the respective product.
Vertical integration allows the company to gain control over its suppliers, transporters, and manufacturers. This means the company has control, right from the production to the distribution of the product.
Vertical integration helps in cutting the cost of production and wastage. This allows the business to be self-sufficient.
Vertical integration is divided into two types. They are Forward integration and Backward integration.
Forward integration is an upstream process of acquiring the intermediaries who are in the following stage at the supply chain, while backward integration is a downstream process of acquiring the intermediaries who are in a level previous to the company at the supply chain.
For instance, let’s take “Z,” a potato chip manufacturing company. Under Vertical integration, Z company plans to acquire its raw materials supplier. This means Z company is pursuing Backward integration.
If Z company plans to take possession of its distributors or its logistics provider, it means Z company is pursuing Forward integration.
What is Horizontal Integration?
Horizontal integration is a type of merger that helps in dominating the market. The merger means the joining of two same companies that are equally competitive.
A company that is planning to increase the size of its business can pursue this method of Horizontal integration. Under Horizontal integration, a company plans on obtaining those companies who are producing the same line of products.
Horizontal integration helps eliminate the company’s competitors and establish a monopoly market. Sometimes it may result in an oligopoly market.
Horizontal integration paves the way for increasing the production level and achieving economies of scale. It helps in diversifying its products or services and gets access to a large customer base. It helps the company to do business in multiple locations.
Horizontal integration also helps in increasing the market shares of the company. Although Horizontal integration comes with a lot of advantages, it does have cons.
Some of the main disadvantages of Horizontal integration include Reduced flexibility, Minimalizing value, and anti-trust law that paves the way for legal issues.
The purpose of Antitrust law is to protect the consumers from the control of large business firms and to prevent monopoly, thereby ensuring fair trade practices in the market.
The best example of Horizontal integration is the merging of Facebook and Instagram.
Main Differences Between Vertical and Horizontal Integration
- Horizontal integration is the acquiring of the same business by a company to obtain market power, while Vertical integration is the acquiring of a similar company that deals with the same product but is at a different stage of the supply chain.
- Horizontal integration targets the market and becomes the principal supplier of a product or service. Vertical integration targets the industry and improves supply chain coordination by taking control over other parties that operate in the same chain.
- Vertical integration is of two types, namely Forward integration and Backward integration. Horizontal integration does not have any type.
- The capital requirement for Vertical integration is low as compared to Horizontal integration. Vertical integration helps in cost efficiency.
- Vertical integration allows the business to be self-sufficient, while this is not possible under Horizontal integration.
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Piyush Yadav has spent the past 25 years working as a physicist in the local community. He is a physicist passionate about making science more accessible to our readers. He holds a BSc in Natural Sciences and Post Graduate Diploma in Environmental Science. You can read more about him on his bio page.