Understanding horizontal integration vs vertical integration with real world examples

When you start a business, one of the primary aims is to grow your customer base, not the profits since no profits without customers. After obtaining your customer base, you want to offer them superb products or services that they can’t resist but to keep coming for more. Right? However, this doesn’t take days or months, but some years. There are two ways to achieve growth; vertical and horizontal integration

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Such kind of business expansions calls you to spend massive resources such as capital, labor, and above all, business expansion strategy. Honestly, there exist countless strategies that companies can apply to thrive above their competitors at a higher level. These strategies are grouped into two main categories: vertical integration and horizontal integration.

Horizontal Integration

Horizontal integration is growth that is achieved when a company acquires other companies
Horizontal integration is achieved when a company acquires other companies

Horizontal integration is a business strategy that involves a company to acquire another company that lies under the same industry, business line,or doing the same thing. An excellent example is when a bread company buys another bread company.

This strategy is mostly used by companies that want to obtain a large customer base or monopolistic advantage. They aim at reducing the competition while increasing the market share for them to develop specific economies of scale.

Some of the real-world examples of horizontal integration include:

  • When Facebook bought Instagram in 2012- realize that these are both social media platforms that allow photo posting.
  • When McDonald acquired Burger King. And they both fall under the same industry.
  • When Anheuser-Busch InBev purchased SABMiller in 2016. They were both in the same beer-brewing industry, but they were competing.
  • When Marriott bought Starwood Hotels & Resorts Worldwide, and they were both in the hospitality industry.
  • When Walt Disney acquired Pixar Animal Studio back in 2006.

By purchasing another business in the same business line, you are eliminating competition. Less competition promotes monopoly and consolidation in the industry. If the industry contains some independent players, then an oligopoly is created.

Again, the company diversifies its goods or services. Horizontal integration ensures the entity thrives in its operational size and enjoys economies of scale following its increased production level.With the increased production level, the business can reach a significant number of customers and a broader market.

Vertical integration

Contrary to horizontal integration, this is a competitive strategy that occurs when a company operating within a particular supply chain decides to buy another company within the same supply chain.

Vertical integration is split into two:

Forward integration

This is where a company buys the distribution channels that help to distribute their good or services.

A great example is when a bread company can buy the trucking company that transports their loaves of bread to retailers in different locations.

Backward integration

It’s where a company purchases units that supply them with raw materials.

For example, a bread company can buy the company that supplies them with raw material to make the bread.

Vertical integration is mostly used by companies that want to eliminate overall costs and also activate the supply chain operations. Again, vertical integration helps a company to control the activities of the raw ingredients company or the trucking company.

Some of the real-world examples include:

  • Alibaba owns the entire system of a search engine, payment, delivery, among others.
  • Ikea bought forests in Romania so that it can independently own the raw materials.
  • Apple controls all its production and distribution processes.
  • Google acquired Motorola, a smartphone producer in 2012.
  • Amazon is producing Kindle Fire Tablets so that customers can read books with them.

Key Differences Between Vertical and Horizontal Integration

There are two ways a company can realize growth; vertical and horizontal integration
A company can achieve growth through vertical or horizontal integration

Meaning

Horizontal integration takes place when a company purchases another in the same industry or with the same operational activities. Conversely, vertical integration takes when a company acquires a company in the same supply chain.

Aim

While horizontalintegration aims at ensuring the business size and production scale increases, vertical integration, on the other hand, aims at strengthening and smoothing the activities in the production-distribution process.

Result

The best thing about horizontal integration is that it cuts off competition, which pushes the company’s market share. In contrast, vertical integration lowers the production costs and reduces wastage of time and resources.

Control

Horizontal integration helps your company to take control of the market. However, vertical integration helps a company to control the whole industry.

Self-Sufficiency

Horizontal integration doesn’t bring self-sufficiency since the company will still need various functional departments to run smoothly but brings synergy. Contrarily, vertical integration promotes both synergy and self-sufficiency since it has acquired another functional level of the business.

Bottom Line

It’s no doubt that these two strategies play a critical role in expanding the company’s business operation and outwitting their competitors. Horizontal integration helps companies to obtain a considerable market share, whereas vertical integration smoothens the operation efficiency as well as enhancing profit margins. Beware! Before choosing between these strategies, consider your company’s growth objectives- both short-term and long-term.

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