Difference Between Horizontal Integration and Vertical Integration (With Table)

Several companies adopt several strategies to drive traffic and increase their potential. To build their economic and social state, many strategies help them to stay intact in the market. By implementing those strategies, several perks are obtained, such as growth in the size of the company, surge in product differentiation, accessibility to new markets etc. Two of such strategies are 1. Horizontal Integration and 2. Vertical Integration.

Horizontal Integration vs Vertical Integration

The difference between horizontal integration and vertical integration is the objectives that are achieved by implementing these strategies. The objective that is achieved by implementing horizontal integration is an increase in the size of the business/company. On the other hand, the objective that is achieved by implementing vertical integration is bolstering the supply chain.

The strategy when two companies or firms come together whose products and production is at equal level is known as horizontal integration. Horizontal integration is a strategy that is used to practice control over the market. The consequences after the implementation of horizontal integration are that maximum competition is discarded and market share is obtained.

The strategy in which when a company or firm takes over another company that has a different level of production is known as vertical integration. Vertical integration is a strategy that is used to practice control over the industry. The consequences after the implementation of vertical integration cost, as well as wastage, is decreased.

Comparison Table Between Horizontal Integration and Vertical Integration

Parâmetros de comparação Horizontal IntegrationVertical Integration
Definição The strategy when two companies or firms come together whose products and production is at equal level is known as horizontal integration.The strategy in which when a company or firm takes over another company that has a different level of production is known as vertical integration.
MotivoGrowth in the company size.Bolstering the supply chain.
Ways to implementInternal expansion, acquisition, mergerBy development of an extended production chain.
VantagensIncrease in the revenue, a larger number of customers, increase in market share, competition is eliminated, a larger scope of economies, reduction of production costs.Bolstering of the supply chain, profit margins both upstream and downstream are gained, investment is facilitated.
Desvantagens With less flexibility, cost sometimes is destroyed rather than created.Capacity-balancing problems are created sometimes, flexibility is reduced, market entries can be difficult.

What is Horizontal Integration?

The strategy when two companies or firms come together whose products and production is at equal level is known as horizontal integration. It is a strategy that results in the elimination of maximum competition, and market share is obtained. In this strategy, two companies come together to obtain certain objectives to grow their company size and gain profit.

Horizontal integration can be implemented in various ways, which include Internal expansion, acquisition, fusão. Both the integrated companies gain profit and benefit from this strategy. There are various examples of horizontal integration. Various companies and brands that have adopted this strategy include Heinz and Kraft Foods merger. Other examples include Pixar and Disney merger.

The process can lead to a monopoly when there is a majority of product or service in the market. There are several advantages and disadvantages of horizontal integration. The advantages include, Increase in revenue, a Larger number of customers, an increase in market share, competition is eliminated, a larger scope of economies, reduction in production costs. Disadvantages include Less flexibility. Cost sometimes is destroyed rather than created.

Various companies that implemented horizontal integration are Porsche and Volkswagen, Daimler Benz and Chrysler, Kraft Foods and Cadbury, Quaker Oats and Snapple, PepsiCo and Quaker Oats, Pfizer and Wyeth, AT&T and T móvel, HP and Compaq, Pfizer and Pharmacia Corporation, United Airlines and Continental, JPMorgan Chase and Bank One, Microsoft and Yahoo!, etc.

What is Vertical Integration?

The strategy in which when a company or firm takes over another company that has a different level of production is known as vertical integration. It is a strategy that results in a decrease in cost as well as wastage. It is a strategy when one company takes over another company that has a different level of products and production than the acquiring company.

Implementation of vertical integration is done by the development of an extended production chain. The companies that use this strategy are allowed to control processes, and also they can improve effectiveness. There are various examples of vertical integration. Various companies and brands that have adopted this strategy include Netflix, which is a well-known example.

By implementing vertical integration, a company owns and controls fornecedores, distributors, and retail locations and therefore bolster its supply chain. There are three subtypes of vertical integration, namely, backward vertical integration, forward vertical integration and balanced vertical integration. Both upstream and downstream profit margins are gained when a company implements vertical integration. Investment is facilitated too.

Various companies and brands that implemented vertical integration are Apple and AuthenTec, Amazon, Carnegie Steel, Ikea, Netflix, Zara, McDonald’s, Walmart, Starbucks, Nutriva group model, DMART, Alibaba. PayPal and eBay, Wholefoods and amazon are examples of forwarding vertical integration. Apple, Macdonald’s are an example of backward vertical integration. This strategy is beneficial although it has its disadvantages too, which includes capacity-balancing problems, difficulty in market entries etc.

Main Differences Between Horizontal Integration and Vertical Integration

  1. In horizontal integration, the capital requirement is higher. On the other hand, the capital requirement is lower in vertical integration.
  2. Self-sufficiency is not acquired in horizontal integration. On the other hand, self-sufficiency is acquired in vertical integration.
  3. Horizontal integration is implemented to exercise control over the market, and vertical integration is implemented to exercise control over the industry.
  4. The main objective of implementing horizontal integration is to grow the size of the company. On the other hand, the main objective of implementing vertical integration is to bolster the supply chain.
  5. The implementation of horizontal integration results in the elimination of competition. On the other hand, the implementation of vertical integration results in the reduction of cost as well as wastage.

Conclusão

A company or brand, or a firm grows massively by adopting these strategies, and the customer’s needs are fulfilled. There are pros as well as cons. If we overlook the cons, the pros are much beneficial.

Better employment opportunities are made available to people if a company grows more, and many other benefits are gained when companies adopt such strategies. Many other strategies ought to be introduced in this area in upcoming years.

Referências

  1. https://journals.aom.org/doi/abs/10.5465/256208
  2. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1756-2171.2009.00068.x