Vertical vs Horizontal Integration
Horizontal and vertical integration are tactics that are used by firms to expand their business operations. A company may decide to acquire companies in the same industry producing/providing the same product/service or acquire companies that become part of the entire production process. The article that follows explains both vertical and horizontal integration processes and explains how they are different to one another.
What is Vertical Integration?
Vertical integration occurs when a company expands control over a specific industry’s entire supply chain. There are three types of vertical integration; backwards, forwards, and equal (both forward and backwards). Vertical integration can occur either way; towards the customer or towards the raw materials that are used for production of goods. For example, a producer of flour for bakeries can vertically integrate by going backwards towards the raw materials, which is to start their own farming operations or vertically integrate forwards towards the consumer by opening up their own bakery.
Vertical integration provides the company with greater control in all aspects of the production process which also results in lower cost and better management of overall production. Vertical integration also results in supplies and selling avenues being secured for the firm. This means that, when a company supplies its own raw materials, it can ensure that raw materials are available for production without having to rely on a third party supplier. Same goes with sales avenues, all that is produced can be sold in the company’s own outlets instead of having to sell through an intermediary that may have their own purchasing budgets. Selling directly to consumers can also result in better margins; since there are no intermediaries the full sales amount will be available to the firm.
What is Horizontal Integration?
Horizontal integration is when a company acquires or merges with another company within the same industry that sells a similar product or provides a similar service. Horizontal integration is aimed at increasing market share and eliminating competition. An example of horizontal integration would be the flour producer acquiring or merging with a number of flour producers within the area or producers that are dispersed geographically. This will provide the flour producer greater control over the flour industry which will result in greater market share and monopoly.
Horizontal integration will allow a firm to expand into new business with less hassle and cost as they are buying an already established profitable business. Horizontally integrated firms are larger and will, therefore, be able to enjoy economies of scale. However, if the firm becomes too large, that may result in the enforcement of anti- monopoly restrictions.
What is the difference between Vertical and Horizontal Integration?
Horizontal integration and vertical integration are both forms of expansion and allow the company to gain better control, market share, economies of scale, etc. Vertical integration occurs when a firm either goes forward and purchases the seller/distributor or goes backwards and purchases the raw materials supplier. Horizontal integration, on the other hand, is when a company acquires or merges with a similar firm in the same industry. Vertical integration provides a greater level of control over the entire production process and can, therefore, result in lower cost and wastage. Horizontal integration, on the other hand, is aimed at gaining more market share, eliminating competition and achieving economies of scale.
Summary:
Vertical Integration vs Horizontal Integration
• Horizontal integration and vertical integration are both forms of expansion and allow the company to gain better control, market share, economies of scale, etc.
• Vertical integration occurs when a company expands control over a specific industry’s entire supply chain. It may go forward and purchase the seller/distributor or goes backward and purchases the raw materials supplier.
• Horizontal integration is when a company acquires or merges with another company within the same industry that sells a similar product or provides a similar service.
• Vertical integration provides a greater level of control over the entire production process and can, therefore, result in lower cost and wastage. Horizontal integration, on the other hand, is aimed at gaining more market share, eliminating competition and achieving economies of scale.