Differences Between Horizontal and Vertical Integration

When a business kicks off into the market, it aims to grow its customer base and its capacity to deliver the best of its products and services to the customers. But easier said than done, this has never been a sprint but a marathon.

Such expansions in the business world require a lot of resources in terms of finances, human capital, and, most importantly, a business expansion strategy. As a result, companies employ many strategies to establish their place amongst their peers in the market. Still, one can group them into two at a high level, namely horizontal and vertical integration.

What is Horizontal Integration?

Horizontal integration is a business expansion strategy that involves a company acquiring other companies from the same business line or at the same value chain level to subside competition.

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  • Due to lesser competition, there operates an environment of consolidation and monopoly. However, it can also create an oligopolyOligopolyAn oligopoly in economics refers to a market structure comprising multiple big companies that dominate a particular sector through restrictive trade practices, such as collusion and market sharing. Oligopolists seek to maximize market profits while minimizing market competition through non-price competition and product differentiation.
  • read more if there are still some independent players in the market.The company can also diversify its products and services. A company’s horizontal integration expansion grows its operational size and economies of scale due to increased production levels.It helps the company to reach a larger customer base and market. However, horizontal integration often raises antitrust concerns, as the combined firm will have a larger market share than either firm did before merging.Some recent examples of such a strategy would be Walt Disney Company’s $7.4 billion acquisition of Pixar Animation Studios in 2006.

What is Vertical Integration?

Vertical integrationVertical IntegrationVertical integration is a corporate approach to take charge of its value chain or supply chain functions. It is the process of holding and managing the distributors, suppliers and retail locations at the company’s discretion.read more is a business expansion strategy comprising a company acquiring various entities engaged in different value chainValue ChainValue chain (VC) refers to the sequence of activities and processes a business undertakes to add value to its product or service at every stage from its inception to delivery.read more stages.

  • In vertical integration, two firms doing business for the same product but are currently at different levels of the supply chain process merge into a single entity, opting to continue the company on the same  product line Product LineProduct Line refers to the collection of related products that are marketed under a single brand, which may be the flagship brand for the concerned company. Typically, companies extend their product offerings by adding new variants to the existing products with the expectation that the existing consumers will buy products from the brands that they are already purchasing.read more as before integration.Vertical integration is an expansion strategy used to gain control over the entire industry. There are mainly two forms of vertical integration: forward integrationForward IntegrationForward integration is a strategic approach where the companies move ahead in the supply chain and take over the distribution and retail activities. The purpose of this vertical integration is to achieve cost efficiency.read more and backward integrationBackward IntegrationBackward Integration is a vertical integration type in which a Company buys or integrates with its supplier firms to improve efficacy, save costs, & gain more control over the production process.read more.In a merger situation where the company acquires control over its distributors, it refers to downstream or forward integration. In contrast, it is upstream or backward integration when the company receives control over its supplier.

Horizontal vs. Vertical Integration Infographics

Key Differences

  • Horizontal integration occurs between firms that are similar in product and production level. In vertical integration, the two firms to be merged operate at different supply chain stages.Horizontal integration brings synergy but not self-sufficiency to work independently in the value chain, while vertical integration helps the company gain independence.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 integrationExample Of Horizontal IntegrationHorizontal Integration is a merger that takes place between two companies operating in the same industry. These companies are usually competitors and merge to gain higher market power and economies of scale, an extensive customer base, higher pricing power, and lower employment cost.read more in producing processed food for the consumer market.Target, which has its store brands, is an example of vertical integration. It owns the manufacturing, controls the distribution, and is the retailer, offering products at a much lower price by cutting out the middleman.

Comparative Table

Application of Horizontal and Vertical Integration

The firms mainly use integration strategy to:

  • The Heinz and Kraft Foods merger is an example of horizontal integrationExample Of Horizontal IntegrationHorizontal Integration is a merger that takes place between two companies operating in the same industry. These companies are usually competitors and merge to gain higher market power and economies of scale, an extensive customer base, higher pricing power, and lower employment cost.read more in producing processed food for the consumer market.Target, which has its store brands, is an example of vertical integration. It owns the manufacturing, controls the distribution, and is the retailer, offering products at a much lower price by cutting out the middleman.

  • Minimize competition by taking over competitorsIncrease their market sharesBecome more diversified in operational presenceEliminate the cost of developing and making a new product available.

Horizontal integration can prove to be a successful strategy when: –

  • Competitors are not in the capacity to go for head-on competition for long due to the limitation of resources at their disposal.A company is competing in a growing industry.Economies of scale or monopoly are beneficial for all the business stakeholders.

Though horizontal integration, as explained above, may appear to be a promising strategy, it may not work in all situations. It depends on the company’s value proposition and its resources and capabilities. The model provides a great recipe for success and leverage but is limited to factors such as the synergySynergySynergy is a strategy where individuals or entities combine their efforts and resources to accomplish more collectively than they could individually.read more created through horizontal integration to promote the products and services at the new scaled-up production levels and depends on the company’s place in the entire value chain.

Vertical integration helps a company in: –

  • Increasing entry barriers for new entrants Entry Barriers For New EntrantsBarriers to entry are the economic hurdles that a new entrant must face in order to enter a market. For example, new entrants must pay fixed costs regardless of production or sales that would not have been incurred if the participant had not been a new entrant.read more.Absorbing both upstream and downstream profitsSmoothening the supply chain.

But vertical integrations may also cause: –

  • Fall in the quality of goods due to lack of competitionCompanies focus less on their core competenciesCore CompetenciesThe core competencies in business refer to its resources and unique fundamental capabilities that distinguish it from market competitors. It is an essential component of marketing strategy leading to brand recognition and business growth. The concept serves to be useful for companies focusing on multiple product lines and operating more than one business unit at a time.
  • read more and more on newly acquired businessesReduction in flexibility to increase or decrease production levels.

Conclusion

Choosing between these inorganic strategies must involve considering short-term and long-term growth objectives. While horizontal and vertical integration mergers represent significant benefits, a company must remember that such a transaction is only successful if the new company integrates strategically and seamlessly. So, the merger should create some value in terms of synergy, market leadership, or cost leadership, which could then be translated into profits, promising a long-term customer base and a sustainable business environment.

Whether to employ horizontal or vertical integration has a long-term influence on a company’s business strategy.

This article is a guide to Horizontal vs Vertical Integration. Here, we discuss the top differences between horizontal and vertical integration with infographics and a comparison table. You may also have a look at the following articles: –

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