Introduction
Companies often use competitive tactics such as horizontal integration and vertical integration to bolster their positions and differentiate themselves from their rivals. Both of these approaches to expanding a company's market presence entail the purchase of existing companies. There are significant distinctions between these two business approaches, even though both may facilitate the growth of firms. When a company expands by buying other, related businesses—specifically those that compete with it—this is an example of horizontal integration. Vertical integration, on the other hand, is when a company gains control of one or more stages in the manufacturing or distribution of a good or service, therefore acquiring ownership of all of the components that make up the industrial process.
It is necessary for a company to periodically plan growth plans since expansion is one of the most significant aspects of a successful organization. When it comes time for a business to determine whether to develop and expand by purchasing another firm (ideally a smaller one) or by enhancing its whole supply chain, integration is a critical component that must be taken into consideration. Integration may be broken down into two distinct categories: vertical integration and horizontal integration.
Vertical Integration vs Horizontal Integration
The primary distinction between vertical and horizontal integration is that vertical integration involves a company acquiring another company that already operates within the same supply chain. On the other hand, horizontal integration involves a company attempting to acquire a company that is comparable to or in competition with itself to lessen the number of firms with which it must compete and increase the likelihood that it will become a market monopolist.
When a firm wants to gain influence over an entire industry, one strategy it might use is called vertical integration. A vertical integration strategy involves a corporation making an attempt to purchase another business that is involved in the same supply chain (for example its raw material supplier or transporter). The organization may see cost savings and a sped-up manufacturing process as a result of implementing vertical integration, which offers several benefits.
The corporation was able to strengthen its grip on the market via the implementation of horizontal integration. In horizontal integration, one firm seeks to buy another company that competes with it in the market or that makes products in the same general category. This assists with the elimination of rivals and open the road for becoming the monopolist and gaining economies of scale.
The purchase of another firm operating within the same industry as one's own is an example of horizontal integration, which is a kind of growth strategy used by certain businesses. The practice of one business taking control of one or more steps in the manufacture or distribution of a product is an example of vertical integration, which is a kind of growth strategy. A corporation will use any of these tactics to strengthen its position in the marketplace relative to that of its rivals.
Difference Between Vertical and Horizontal Integration in Tabular Form
| Parameters of Comparison | Vertical Integration | Horizontal Integration |
| Meaning | In the process known as vertical integration, the corporation seeks to shorten its supply chain by acquiring its many suppliers and distributors. | In horizontal integration, one business acquires another that offers the same product or service to reduce the number of firms that compete with it on the market and take over the majority of the industry. |
| Capital | It calls for a significant investment. | It demands a lesser amount of capital in comparison. |
| Purpose | Here purpose is to achieve greater cost efficiency while also reducing waste. | to acquire control of the market and to set up a market similar to a monopoly. |
| Control | to achieve dominance over the industry. | to achieve dominance over the market. |
| Example | Apple Inc. is the greatest example of a company that has vertical integration. | The recent merger between Facebook and Instagram is an excellent illustration of horizontal integration. |
What is Vertical Integration?
The corporation can exert more influence over the market because of its use of vertical integration. In this scenario, one firm often acquires another company that is engaged in the production of the same product but is located farther down the supply chain than the first company. To put it another way, the business takes care of all the middlemen and other third parties involved in the production of the product in question.
Through the use of vertical integration, the corporation can establish control over its producers, as well as its transporters and suppliers. This indicates that the corporation has control over the whole process, beginning with the manufacture and continuing with the distribution of the product. The costs of production and waste may be reduced thanks to the benefits of vertical integration. This enables the company to function without any outside assistance.
There are two distinct categories of vertical integration. Forward integration and backward integration are their respective names. In the supply chain, forward integration refers to the process of acquiring intermediaries that are in the stage that comes after the firm in question, while backward integration refers to the process of acquiring intermediaries that are in a level that comes before the company in question.
Take for example the manufacturing business known as "Z," which specializes in potato chips. Z firm is planning to buy its raw materials supplier as part of a vertical integration strategy. This indicates that Z firm is working on achieving backward integration. If Z firm intends to acquire ownership of its distributors or the company that handles its logistics, this indicates that Z company is moving toward forwarding integration.
The term "vertical integration" refers to the relationship that exists between two companies that produce the same product but operate at distinct stages of the manufacturing process. The company has decided to go on with the business using the same product line as it had before the merger. It is a method of expanding one's business to acquire control of a whole industry.
Apple is the company that best exemplifies vertical integration since it is the most successful and well-known producer of mobile devices such as smartphones, laptops, and so on. It is in charge of the whole manufacturing and distribution process, from the very first step to the very last one. One additional illustration of this is the Chinese e-commerce business Alibaba, which controls the complete payment system, the delivery system, the search engine, and a great deal more besides.
What is Horizontal Integration?
One kind of merging that may be used to achieve market dominance is known as horizontal integration. The merger will result in the combination of two firms that operate in the same industry and are equally competitive. This strategy of horizontal integration may be pursued by a firm that has expansion plans for its operations shortly. A corporation may pursue horizontal integration if it intends to acquire other businesses that are engaged in the production of the same kind of product.
The elimination of the company's rivals and the establishment of a dominant market are both assisted by horizontal integration. There is a possibility that it will lead to an oligopoly market. The implementation of horizontal integration lays the door for increased production levels and the realization of economies of scale. It is beneficial to the company's efforts to diversify its goods or services and provides access to a vast client base. It is beneficial to the organization to do business in several different places.
Additionally helpful in expanding the company's market share is the practice of horizontal integration. Although many benefits come with horizontal integration, there are also some drawbacks associated with this strategy. Less flexibility reduced potential for value creation, and potential violations of antitrust law are among the primary drawbacks of horizontal integration. These may all lead to potential legal complications. The objective of antitrust legislation is to protect consumers from being controlled by huge corporate enterprises and to avoid monopolies, with the end goal of ensuring that fair trade practices are followed in the market. The horizontal integration seen in the combination of Facebook and Instagram is best shown by this example.
Horizontal integration is the term used to describe what happens when two or more companies that operate in the same industry and at the same level of activity decide to combine into a single entity. Complementary products, by-products, or any other related or competitor products may be included in the product, as well as entry into the product's repairs, services, and maintenance area.
The practice of horizontal integration between companies in a market tends to lessen the level of competition between those companies since it increases the likelihood of a monopoly being formed if the companies that make a product decide to join forces. On the other hand, it may also result in the formation of an oligopoly in the event that there are still some independent producers operating in the market.
It is a strategy that the majority of firms use in order to grow their business and generate economies of scale as a result of greater levels of production. This will assist the organisation in breaking into new markets and gaining new clients. In addition to that, the organisation has the capability of expanding its product and service offerings.
Main Differences Between Vertical and Horizontal Integration in Points
- Vertical integration refers to the process by which a company obtains market power by acquiring a similar company that deals with the same product but is located at a different stage of the supply chain. Horizontal integration refers to the process by which a company obtains market power by acquiring the same business.
- The objective of horizontal integration is to corner a market and establish oneself as the dominant provider of a product or service. Vertical integration is a strategy that targets industry and enhances the coordination of the supply chain by acquiring control of other parties that operate in the same chain.
- There are two distinct forms of vertical integration, which are referred to as forwarding integration and backward integration respectively. The term "type" does not apply to horizontal integration.
- When compared to the need for capital in Horizontal integration, the demand for Vertical integration is far lower. Cost savings may be realized via the use of vertical integration.
- While horizontal integration makes it impossible for a company to achieve self-sufficiency, vertical integration makes it feasible for businesses to do so.
- Vertical Integration helps the organization obtain both synergy and self-sufficiency, while horizontal integration just brings synergy to the table and does not contribute to self-sufficiency.
- Vertical integration is a technique that is utilized to acquire control over the whole industry, while horizontal integration is a tactic that is used to achieve control over a specific market.
- When a firm is competing in a sector that is seeing rapid expansion, horizontal integration may show to be an effective approach. On the other hand, vertical integration might result in a reduction in the company's flexibility to either raise or reduce production levels.
Conclusion
Vertical integration and horizontal integration both contribute in their unique ways to the expansion of a company's operations and profits. Vertical integration, on the other hand, refers to the process of acquiring another company that is located at a different stage of the same supply chain. Horizontal integration, on the other hand, refers to the ownership of a completely different company that deals with the same line of products. Vertical integration and horizontal integration both refer to the same process. A business needs to plan for its growth and development from time to time, and for the firm to do so, the company must carefully research the benefits and drawbacks of both horizontal and vertical integration to decide between the two.
The companies utilize the integration approach to grow their market share, become more diversified, eliminate the expense of creating new products and launching them to the market, minimize competition by taking over the businesses of their competitors, and for a variety of other reasons.
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
