Horizontal integration is when a business acquires/merges with another business operating at the same level in a value chain. Generally, such integration aims to grow the business, expand in the new markets, diversify the product portfolio, and reduce operational competition in the market. For instance, a dying company acquires another dying company to expand its operations. It’s an example of the horizontal integration.
On the other hand, vertical integration is when the business expands its operations in the supply chain. This integration is between the companies that operate at different levels of the supply chain.
It can be either forward or backward (in either direction). This integration aims to expand the business operations and achieve exponential growth. For instance, if a cloth dying company acquires cloth manufacturing, it’s said to be backward integration. On the other hand, if the color dying company acquires a stitching company, it’s said to be forward integration. So, if you are moving back in the supply chain, it’s called backward integration. However, if you move ahead in the supply chain via acquisition or integration, it’s called forward integration.
Horizontal integration strategy
The horizontal integration strategy is when integrating companies operate at the same level of the supply chain. Following are some of the purposes that back horizontal integration strategy.
- Economies of scale achievement.
- Achievement of market power and dominance.
- To achieve product differentiation in terms of quality/price.
- A way to enter the new market.
- Achievement of synergy (revenue/profit multiplication via enhanced operational performance).
- Control of the competition in the market. However, it should be noted that regulators might be following the transaction if there is any impairment of consumer rights.
Horizontal integration companies/examples
- Acquisition of continental and united airlines (integration of airlines)
- Pixer animation studio and Walt Disney (integration of digital companies)
- Mittal and Arcelor (steel producing companies)
- Instagram and Facebook (social media companies)
- Nike and Adidas (Apparel, accessories, and sports)
Advantages of horizontal integration
Following are some of the advantages of horizontal integration.
- There is aggressive growth in the market share. The combining companies use their resources together. These resources include but are not limited to integration of production base, marketing channels, technology, distribution channels etc.
- The integrating companies are expected to have exponential revenue growth. It’s because of synergy in customer, marketing, and distribution base.
- Achievement of economies of scale leads to reduced cost per unit. Hence, higher profit can be expected.
- Market share of the acquiring company increases. It leads to higher company stability.
Disadvantages of horizontal integration
Following are some of the disadvantages of horizontal integration.
- Significant regulation applies to the merger and acquisition. It’s because such mergers/acquisitions lead to monopoly and impairment of customer rights. In other words, companies might enter a state of dominance and obtain unwanted advantages. Hence, there is a significant need to actively handle regulatory aspects of the transaction.
- The size of the company exponentially increases. Hence, it may be difficult to control operations.
- Sometimes, integration might lead to value destruction. It’s because a newly merged company may be confused in terms of operational aspects.
Vertical integration strategy
Vertical integration strategy is when integrating companies operate at different stages of the supply chain. It can be backward and forward integration.
Backward integration is when the company acquires its supplier. In other words, they move up in the supply chain and they acquire supplier business. On the contrary, forward integration is when the business acquires its customer business. They move down in the supply chain and sell after further processing the goods/products.
Vertical integration examples/companies
Following are some examples of vertical integration.
- Mondelez acquires a bean processor (supplier integration/backward integration).
- Amazon acquires product Distribution Company.
Advantages and disadvantages of vertical integration
Following are some of the advantages of vertical integration.
- Improved control of the supply chain. Hence, product quality and other aspects can be controlled.
- Process efficiency for the supply chain is expected to increase with the enhanced control.
- The overall cost is expected to reduce with vertical integration.
- Cost or production is reduced with vertical integration.
- Overall turnaround time decreases with the vertical integration.
Following are some of the disadvantages of vertical integration.
- The cost of the integration can be higher.
- There may be a need to raise leverage to finance the integration.
- The process of vertical integration can be difficult.
Conclusion
Horizontal integration is when two companies integrate at the same level of a supply chain. For instance, a bike manufacturing company acquires another manufacturing company is horizontal integration. On the other hand, vertical integration is when companies operating at different levels of the supply chain merge with each other. Further, vertical integration can be backward or forward.
