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When it’s time to grow, businesses often choose mergers and acquisitions as the most efficient way to expand. Such integrations are always related to some challenges: from the process initiation to the integration of two different management systems. The first step in this process is to understand, what is horizontal and vertical integration. The first is acquiring similar companies, and another is about integrating with another-level business from your supply chain. This understanding would allow you to make a correct decision on where to start and what would be the best for you and your business.
In this article, we will cover the difference between the two approaches: horizontal integration vs. vertical integration, touch on a business vertical point and discuss the advantages and challenges of both vertical and horizontal integration.
What does vertically integrated mean? Vertical integration is a strategy of integrating business with other businesses up or down the supply chain. The strategy is effective for greater control over the whole manufacturing process, timing, and all stages of development. Besides this, vertical integration has many advantages for business growth.
Most businesses take control over the lower levels of the supply chain as it makes them more confident in everything they do and the result expected. However, there are some deeper reasons why businesses choose this approach:
While being highly efficient, the approach has its own drawbacks and challenges that may appear as some obstacles to further growth:
The most famous vertical integration examples are Apple, Mcdonald's and Amazon.
A good example of vertical integration is Apple, which keeps controlling the whole manufacturing process. Having used to outsource producing some parts before, the company now manufactures basically everything: from chipsets to cases. This allows Apple to offer unique products, hard to counterfeit, keep client loyalty worldwide, and guarantee their products' high quality.
Another business that integrated vertically and won the competition game is Mcdonald's. The company acquired some plants and also created its own manufacturing businesses to ensure the consistency of its products around the globe and better quality.
As it often happens to marketplaces, Amazon has also used vertical integration to grow, as they stopped using third-party partners for major logistics and packaging processes. Instead, they created their own departments that control it all. Moreover, Amazon has created its own electronics and household brands, which are produced under the total control of Amazon.
By contrast with vertical integration, horizontal expansion supposes merging with companies that are in the same industry and at the same stage of the supply chain. These can be competitors, suppliers, or companies that produce similar goods or services. Mostly, businesses choose this approach to increase market share, reduce competition, and achieve economies of scale.
Horizontal integration is a good option for companies if they need to grow without huge budgets. Here are some advantages businesses can get by choosing this approach:
Horizontal integration offers several serious advantages; however, this is a challenging process with possible drawbacks that companies should consider. We list some of the challenges horizontal integration brings.
The well-known businesses who integrated horizontally are Disney, Facebook and Coca-Cola.
Disney and Pixar merge is a perfect example of horizontal integration. Disney purchased Pixar back in 2006. Since then, the companies have featured a competitive rise as they integrated their capabilities and bundled technologies, gained greater market power, and now provide higher quality.
In 2012, Facebook merged with Instagram horizontally and grew its revenue significantly. This way, Facebook acquired a competitor while growing bigger and getting more capabilities. The merger allowed Facebook to attract more users and grow its positions among other social media.
Another example from the FMCG industry is Coca-Cola which acquired many juice brands around the world. While overcoming antitrust challenges, the company keeps growing as it collects expertise from each of these smaller companies, production assets, and more.
Now it’s time to consider the difference between vertical and horizontal integration. Vertical integration is all about owning and controlling the supply chain from raw materials to finished products so the company can control it all from the very scratch, guaranteeing higher quality and faster production. In this approach, a company is involved in multiple stages of the production process, such as manufacturing, distribution, and retailing.
Horizontal integration, in turn, refers to expanding operations by merging with similar companies at the same level of the supply chain. The company is still involved in the same supply chain stage but is becoming more powerful.
The difference between the vertical and horizontal integration
The differences between vertical and horizontal integration can significantly impact a company's operations and strategy. If you want greater control over their supply chain, consistent quality, and reduced costs, vertical integration will fit the best; however, you must be careful with the future strategy: define the product positioning and target audience carefully, depending on your business goals.
If the business wants to increase its market power, reduce competition, and diversify its product or service offerings, horizontal integration is a perfect choice. While it requires significant investment and can increase a company's exposure to operational and financial risks associated with mergers and acquisitions, cultural clashes, and integration challenges, horizontal integration brings more power and greater capabilities. This means the company should update its strategy and integrate operations for success.
Below, we show how is horizontal integration different from vertical integration.
Vertical Integration
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Horizontal Integration
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The company owns and controls its supply chain, from raw materials to finished products. |
The business expands its operations by acquiring or merging with other companies at the same stage of the supply chain. |
The main benefit is gaining greater control over the supply chain, ensuring consistent quality, and reducing costs. | The approach focuses on increasing market power, reducing competition, and diversifying products and services. |
The main investment target is production facilities, equipment, and logistics. | Investments are needed for integrating operations and merging processes. |
The idea of the integration is to reduce transaction costs, improve coordination, and improve the experience of suppliers and customers. | Businesses do it to beat competitors, get a bigger market share, and reach a wider audience. |
The main risks are associated with production and supply chain management. Once you configure the management system, this risk vanishes. | Along with the operations and management challenges, the business risks encountering antitrust issues, cultural clashes, and more. |
As the difference between vertical and horizontal is clear, the vertical integration approach seems to be easier and seamless and with fewer risks. However, horizontal integration brings more benefits and capabilities while being hard in terms of integration and the long process of cultures merging. In reality, these are just two different approaches that fit different types of businesses. Choosing between these two options highly depends on your current financial capabilities, target goal, niche, and other details. Further, we will explain the factors to consider when you decide on which strategy to choose.
Once you decide that integration is inevitable and this is your perfect way to grow the business, it’s time to choose which one of two approaches would fit your business best: horizontal vs. vertical integration. Here are the main things to consider before making the final decision:
1. Industry trends
Consider the current and future trends in the industry you belong to. Look at the changes in consumer demand, technological advancements, and emerging competition. Answer these questions:
2. Business goals
Once you know what your integration business aims for, it will be easy to choose your type of integration. For example, if the main goal of the business is to increase its market share and reduce production costs, try horizontal integration. But if you want to gain greater control over the supply chain and ensure greater quality for your customers, vertical integration may be a better option. Whatever business model you choose, the questions to answer are as follows:
3. Business's resources and capabilities
Consider financial, managerial, and operational resources to determine which type of integration is feasible. For example, if a business has strong capabilities in supply chain management, vertical integration may be more suitable. The following questions can help:
4. The regulatory environment and potential risks
Anti-trust laws may restrict horizontal integration if it leads to a significant concentration of market power. Intellectual property and licensing may impact the feasibility of vertical integration. Before starting the merger, consider the regulatory environment and assess which legal or regulatory constraints you can encounter in the process. The useful things to think about:
5. Industry structure and fragmentation
Analyze what your industry market looks like: if the industry is full of a few large companies leading the market, choose horizontal integration. However, many industries are fragmented, and competition is shared between many similar companies. In this case, vertical integration can help you reach superiority over your competitors due to a deeper control of all processes and higher quality. Check the following questions to ensure you make a correct choice:
6. Timeframe
Vertical integration usually takes longer to implement and may require more ongoing investment, while horizontal integration significance may be bigger: it can offer more immediate benefits. However, choosing a vertical approach, all you do is continuously grow the quality, but your goal and target audience remains the same, so it doesn't affect your surroundings as much as the horizontal changes. So here are the questions to consider:
7. Technologies needed
Whatever approach you choose, most possibly your business and the acquired/merged one use different technologies to run the business. This means you will have to merge not only cultures but also all the operational processes. This challenge is easy to overcome if you choose a modern headless solution like Virto to integrate into both companies to be merged. The API-based structure allows connecting any operational software together easily and composing a new easy-to-use platform that significantly eases up possible integration challenges. Once you decide to merge, think about the following:
Use these questions to realize which approach will fit you the best. Take your time to learn about all the technical and cultural details of your future merger and prepare well to make the process smooth and seamless.
Both approaches (vertical integration vs. horizontal integration) work well and bring many benefits. Along with the benefits, businesses often encounter some challenges to resolve. When choosing the path to go, the most important step is to assess all the possible benefits and challenges and realize if the benefits will cover the challenges.
Merging is always easier when you know what to do or have a trusted partner to support you. While you have to resolve cultural clashes and business details, let an experienced technology partner like Virto help you with the technical part of merging. The fast and easy technological integration will provide faster time-to-value, the seamless building of the new management processes, from internal processes to creating your own marketplace, and an easy start for your upgraded business.
If you don’t know where to start with both vertical integration and horizontal integration or need to assess your future capabilities by merging your technology stack with the acquired company, reach out to our expert team, who will provide a full analysis and offer the easiest way for you to merge seamlessly.
Yes, Nike uses forward vertical integration, which means they care more about direct sales to customers than merging with producers.
Yes, Apple produces all parts of its products inside the company: from hardware and components to software and accessories — all is done by Apple.