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 for 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 vs Horizontal Integration
The main difference between Vertical integration and Horizontal integration is that under Vertical integration, a company acquires another company that operates within the same supply chain, while in Horizontal integration, a company tries to acquire its similar company or opponent company to reduce its competitors and increase its chance of being the monopolist in the market.
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 (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.
Comparison Table Between Vertical and Horizontal Integration
| 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 are 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 chips 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 which 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 product.
Horizontal integration helps with eliminating 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 achieve 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 includes 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 for obtaining 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.
Conclusion
Both Vertical Integration and Horizontal integration helps in the growth of the business with different approaches. To simply put, Vertical integration is the acquiring of another company that is at a different stage of the same supply chain, while Horizontal integration is the possession of a completely different company that deals with the same line of products. It’s essential for a company to plan for its expansion and development from time to time, and in order to do that, the company must carefully study the pros and cons of both Horizontal integration and Vertical integration and choose between them.
References
- https://www.emerald.com/insight/content/doi/10.1108/09600039110137082/full/html
- https://link.springer.com/chapter/10.1007/978-3-030-30000-5_22