Often companies are faced with the need to have divisions responsible for various aspects of the business. Such division may include product development, marketing, human resource management, accounting, etc. This blog post will cover all aspects and discuss the major difference between horizontal and vertical Integration.
An General Comparison on Horizontal and Vertical Integration
Horizontal Integration is when one business buys out or merges with another company operating at the same production level. Nowadays, many enterprises choose a horizontal integration strategy due to optimization benefits, but it varies with the need. Continue reading to know about the differences between horizontal and vertical Integration to decide the best for you.
Vertical Integration, as the name suggests, is a business strategy in which a company expands its activities by acquiring or merging with businesses operating at different levels of the supply chain. On the other hand, horizontal Integration means to have companies that are not related to each other but operate in the same line of business under one umbrella.
Difference between Horizontal and Vertical Integration
Horizontal and vertical integration difference is a good way to go when making mergers & acquisitions (M & M&A). It is good to understand differences between the two types of Integration to differentiate whether they are better off vertically integrating or merging. Let’s get started with the differences:
What are Horizontal and Vertical Integrations?
Vertical Integration is a process in which firms grow by integrating backward and forward along the production and distribution chains. Vertical Integration has been widely used in oil, steel, automobiles, and electrical equipment.
On the contrary, horizontal Integration means holding several companies in fundamentally different industries under one parent company. For example, the Microsoft Corporation deals with computers as well as entertainment through Xbox games console. These two areas can be considered as horizontally integrated because they are not related to each other directly.
What are the Purpose and Consequences of Horizontal Integration?
A company pursuing horizontal integration occurs when two business units at the same level merge to form one single unit or firm. It means that both units or organizations have similar products with similar resources and management teams to maximize benefits.
Nowadays, many companies use this approach because it provides cost savings and revenue generation ability, but it also depends upon its strategy, like diversification in a different direction.
A horizontal integration company merges with a like-kind business company and runs it together under one umbrella. So why does a firm choose to?
What are the Purpose and Consequences of Vertical Integration?
Vertical Integration is a management strategy that involves the expansion of the company’s scope within a single relevant business area. In other words, it’s when a company expands its current operations by controlling another aspect of production. When a firm vertically integrates, it increases its business’s capabilities instead of simply stopping at one level. This Integration might also provide managerial or marketing benefits; the company will expand its operations and maneuverability to make more profit with better control.
For example, a business deals with the design and manufacturing of computer technologies and decides to expand its operations by entering into the telecommunications market, it will be an example of vertical integration.
Vertical Integration can be used by firms who want to eliminate competition to take over other companies’ market share or introduce new products at lower costs because they won’t have any competitors.
Horizontal Integration occurs typically after an acquisition where there was no vertical cooperation between these two entities beforehand; however, horizontal integrators often need help executing their plans due to a lack of expertise straight away, so they may engage with another firm’s service provider too.
One example of Horizontal Integration is the acquisition of Nokia by Microsoft in April 2014. The reason behind this takeover was that Microsoft wanted to invest heavily. Acquisition of Burger King by Mc Donald and Instagram by Facebook are other common examples of horizontal Integration.
In Vertical integration, firms grow by integrating backward and forward along the production and distribution chains. Apple is its best example as they control the whole production system. Alibaba is another practical example where the entire search engine, payment system, delivery, etc., is owned by the giant retailer.
Key Differences between Horizontal and Vertical Integration
The most common way is to think of integration as the merging of two organizations. The most common example would be an airline merging with another airline, or a hotel merging with another hotel.
These integrations decide the business strategies pursued by companies to expand their operations in the market. The key differences are:
- Vertical Integration places more barriers for new entrants while horizontal Integration competes in the growing industries.
- In vertical Integration, the profits are derived from the downstream and upstream. While in horizontal integration monopoly situation is created for maximum profits
- In vertical Integration, the supply chain is smooth. Likewise, in horizontal Integration, there are limited resources for production.
- In vertical Integration, the good quality can fall as there is no competition. But in horizontal Integration, due to high competition, the quality never gets compromised.
- Vertical Integration focuses more on acquisitions, while horizontal Integration is used to expand the market share.
- Vertical Integration focuses more on eliminating competition while horizontal communication expands business and eliminates the extra costs.
- In a horizontal Integration, one party is at the top and the other is at the bottom. In a vertical Integration, one party is at the top and one party is at the bottom.
- Horizontal integration is a good option for a small company because it gives you a lot of flexibility to grow and expand, while vertical integration is a better option for a large company because it gives you a lot of more resources to grow and expand.
- Vertical integration is when one company buys another company and then uses that company’s products or services in their own business. Horizontal integration buys another company product. It lets the buyer drive the company’s growth.
Firms use integration strategies to grow and scale their business. When it comes to expanding your business, there are two major strategies you can use. Horizontal Integration is when companies acquire or merge with competitors. Vertical Integration involves developing into the production stage of a company’s product line.
Planning a venue, the layout and features, and the amenities required will determine whether your platform will benefit from vertical or horizontal Integration. A good balance between horizontal and vertical Integration is a sign that businesses have a sound strategy. Now that you know everything about horizontal and vertical integrations, you’ll be a lot stronger. What approach do you think would work best for your firm?
Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.