Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.
Aspect
Horizontal Integration
Vertical Integration
Definition
Horizontal Integration is a business strategy where a company expands its presence in the same industry by acquiring or merging with competitors at the same stage of the value chain.
Vertical Integration is a business strategy where a company extends its operations within the same industry but across different stages of the value chain, typically involving suppliers or customers.
Focus
The primary focus of horizontal integration is on increasing market share, reducing competition, and achieving economies of scale by consolidating operations at the same stage of the value chain.
Vertical integration focuses on gaining more control over the supply chain, enhancing efficiency, reducing dependency on external parties, and potentially influencing pricing.
Types
Horizontal integration can be forward or backward. – Forward Integration: Acquiring or merging with companies that are closer to the customer or distribution end of the value chain. – Backward Integration: Acquiring or merging with companies that are closer to the production or raw material end of the value chain.
Vertical integration can be categorized as: – Backward Integration: Extending operations upstream, closer to suppliers or raw materials. – Forward Integration: Expanding operations downstream, closer to customers or distribution. – Full Integration: Combining both backward and forward integration.
Examples
– In the tech industry, Microsoft’s acquisition of LinkedIn is an example of horizontal integration, as both companies offer complementary services in the software and professional networking space. – In the media industry, Disney’s acquisition of 21st Century Fox is an example of horizontal integration, as it combined two major content producers.
– Ford Motor Company’s ownership of steel mills for producing its own raw materials is an example of backward vertical integration. – Apple’s ownership of its retail stores, where it sells its products directly to customers, represents forward vertical integration. – Tesla’s approach to producing electric vehicle components in-house demonstrates full vertical integration.
Benefits
– Increased market power due to reduced competition. – Economies of scale through consolidation of operations. – Improved efficiency in distribution and marketing.
– Greater control over the supply chain, reducing dependencies. – Potential cost savings through efficient coordination. – Ability to differentiate products and gain competitive advantage.
Challenges
– Regulatory scrutiny and antitrust concerns due to reduced competition. – Integration challenges, including cultural differences and management complexities. – Potential resistance from acquired companies.
– Higher capital requirements to invest in various stages of the value chain. – Increased complexity in managing diverse operations. – Risk of overextending and diversifying too much.
Flexibility
– Horizontal integration may offer more flexibility as it focuses on expansion within the same stage of the value chain, allowing companies to adapt to changing market conditions.
– Vertical integration can be less flexible as it involves operations across multiple stages of the value chain, which may limit agility in responding to market changes.
Risks
– Overlapping operations and potential redundancy. – Limited diversification within the industry. – Possible resistance and culture clashes during integration.
– Dependency on the success of integrated stages. – Risk of becoming too large and unwieldy. – Regulatory challenges and scrutiny in certain industries.
Strategic Control
– Horizontal integration does not provide as much strategic control over the entire value chain but can strengthen a company’s position within its specific stage.
– Vertical integration offers greater strategic control over multiple stages of the value chain, allowing companies to influence supply chain dynamics and product quality.
Examples of Benefits
– After the merger with Time Warner, AT&T became a major player in both content creation and distribution, allowing it to offer bundled services and compete effectively in the telecommunications and media industry.
– Amazon’s vertical integration includes owning fulfillment centers, which enhances its control over logistics and allows for faster delivery. This control contributes to Amazon Prime’s value proposition. – Tesla’s full vertical integration enables it to produce electric vehicles with a high degree of customization and control over the entire production process, from batteries to software.
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through consumers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.
Vertical integration is about moving upward, or downward the supply chain to either get closer to product sourcing and manufacturing, therefore improve quality or quality control over the steps it takes to make the product.
Or moving toward the end customer, thus getting closer to the customers . Or both ways.
Luxottica case study
Luxottica business model is a great example of vertical integration, and how over the years it managed to control the overall supply chain, both from a manufacturing standpoint, and a retail standpoint.
Google KaiOS case study
KaiOS is a mobile operating system built on the ashes of the discontinued Mozilla OS. Indeed, KaiOS has developed a robust standalone mobile operating system that turns feature phones (so-called “dumb phones”) into smartphones-like phones.
As feature phones powered by KaiOS have access to mobile apps, connectivity and voice search. KaiOS feature phone business model wants to bring connectivity and the digital revolution to those developing countries (like India and Africa) that have missed out on the smartphone wave due to too high costs of those devices.
Besides, KaiOS might be well suited for the IoT revolution!
When Google put his assistant on millions of phones running the KaiOS operating system, those feature phones turned smartphones, became the basis for Google’s assistant to gather valuable data.
That is how a digital vertically integrated pipeline looks like.
Quick glance at Horizontal Integration
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Perhaps, a manufacturer who buys or merges with another manufacturer, in the same industry, is an example of horizontal integration.
Facebook acquired Instagram and kept it as independent product (for a few years)
Instagram makes money via visual advertising. As part of Facebook products, the company generates revenues for Facebook Inc. overall business model. Acquired by Facebook for a billion dollar in 2012, today Instagram is integrated into the overall Facebook business strategy. In 2018, Instagram founders, Kevin Systrom and Mike Krieger, left the company, as Facebook pushed toward tighter integration of the two platforms.
Back in 2012, Facebook acquired Instagram, for a billion dollar. What seemed expensive at the time, for a mobile app that wasn’t profitable, it became among the most valuable products for the Facebook portfolio.
The horizontal acquisition of Instagram enabled Facebook to dominate the social media industry for yet another decade.
Key takeaways
Horizontal Integration:
Definition: Horizontal integration refers to the expansion or growth of a company by acquiring or merging with other companies at the same level of the supply chain and within the same industry.
Purpose: The primary purpose of horizontal integration is to increase market share, gain a competitive advantage, and achieve economies of scale by consolidating similar businesses and resources.
Example: When a manufacturer acquires or merges with another manufacturer in the same industry, it is an example of horizontal integration. For instance, if a smartphone manufacturer acquires another smartphone manufacturer, it is a horizontal integration.
Case Study – Facebook and Instagram: Facebook’s acquisition of Instagram is a notable example of horizontal integration. Facebook acquired Instagram for $1 billion in 2012. Instagram was an independent product under Facebook’s ownership for a few years. However, as Facebook pushed for tighter integration of the two platforms, Instagram became part of the overall Facebook business strategy. This acquisition allowed Facebook to dominate the social media industry further.
Vertical Integration:
Definition: Vertical integration involves a company taking control of more parts of the supply chain, either by moving upward or downward, thus covering multiple stages of the production or distribution process.
Purpose: The main purpose of vertical integration is to increase control, efficiency, and reduce costs by integrating different stages of the supply chain under a single entity.
Example: If a smartphone manufacturer acquires a company that produces smartphone components (e.g., processors, displays), it is an example of vertical integration. Similarly, if the same smartphone manufacturer acquires a retail chain to sell its products directly to customers, it is also an example of vertical integration.
Case Study – Luxottica: Luxottica is a great example of vertical integration in the eyewear industry. The company controls and owns the entire supply chain, from manufacturing to retail. This allows Luxottica to have better control over product quality, design, and distribution, giving them a competitive advantage in the market.
Additional Case Studies
Vertical Integration:
Apple Inc.:
Description: Apple is known for its extensive vertical integration across hardware, software, and services. By controlling the entire ecosystem, from product design and manufacturing to retail and software development, Apple maintains tight control over the user experience and creates a seamless integration between its products and services.
Method: Apple designs its own hardware components, such as processors (e.g., A-series chips), displays, and cameras, giving it a competitive edge in terms of performance and innovation. The company also develops its own operating systems (iOS, macOS) and software applications (iWork, iLife) to provide a cohesive user experience across its devices.
Implication: Apple’s vertical integration strategy has helped it differentiate its products in the highly competitive tech market, drive customer loyalty, and capture a significant share of the premium segment. By tightly integrating hardware, software, and services, Apple delivers products that are highly functional, user-friendly, and desirable to consumers.
Google (Alphabet Inc.):
Description: Google, now part of Alphabet Inc., has pursued vertical integration primarily through its development of software platforms and services that span multiple industries, including search, advertising, cloud computing, and hardware.
Method: Google’s core search engine and advertising platforms form the foundation of its ecosystem, generating revenue and driving user engagement. The company has expanded into hardware with products like Pixel smartphones, Nest smart home devices, and Google Home speakers. Additionally, Google offers cloud computing services (Google Cloud Platform) to businesses, competing with industry leaders like Amazon Web Services (AWS) and Microsoft Azure.
Implication: Google’s vertical integration enables it to leverage its strengths in software, data analytics, and AI across multiple product categories. By offering a cohesive ecosystem of products and services, Google enhances user engagement, collects valuable data, and creates new revenue streams beyond its core advertising business.
Tesla, Inc.:
Description: Tesla is a pioneer in vertical integration within the automotive industry, producing electric vehicles (EVs), energy storage solutions, and solar products under one roof.
Method: Tesla controls all aspects of its supply chain, from battery production (Gigafactories) to vehicle manufacturing (e.g., Fremont factory). The company also develops its own software for vehicle autonomy (Autopilot) and over-the-air updates, providing continuous improvements and new features to customers remotely.
Implication: Tesla’s vertical integration strategy allows it to innovate rapidly, optimize performance, and maintain a competitive edge in the EV market. By controlling critical components like batteries and software, Tesla reduces dependency on suppliers, mitigates risks, and delivers a unique user experience to its customers.
Microsoft Corporation:
Description: Microsoft has pursued vertical integration by offering a wide range of products and services across software, hardware, and cloud computing.
Method: Microsoft develops and licenses its flagship operating system, Windows, and productivity software suite, Office. The company also manufactures hardware devices like Surface tablets, laptops, and Xbox gaming consoles. Additionally, Microsoft provides cloud computing services through its Azure platform, enabling businesses to build, deploy, and manage applications and services.
Implication: Microsoft’s vertical integration strategy enables it to offer a comprehensive ecosystem of products and services to consumers and businesses. By combining hardware, software, and cloud solutions, Microsoft creates value for customers and drives revenue growth across multiple business segments.
Amazon.com, Inc.:
Description: Amazon is known for its extensive vertical integration in e-commerce, cloud computing, logistics, and content creation.
Method: Amazon operates an end-to-end e-commerce platform, selling a wide range of products directly to consumers and providing fulfillment and delivery services through its extensive logistics network. The company also offers cloud computing services through Amazon Web Services (AWS), content streaming through Amazon Prime Video, and hardware devices like Kindle e-readers and Echo smart speakers.
Implication: Amazon’s vertical integration strategy allows it to control key aspects of the customer experience, from product discovery and purchase to delivery and support. By owning critical infrastructure and services, Amazon reduces dependency on third-party providers, improves operational efficiency, and enhances customer satisfaction.
Samsung Electronics Co., Ltd.:
Description: Samsung is a global leader in consumer electronics, semiconductor manufacturing, and telecommunications.
Method: Samsung vertically integrates across various stages of the electronics value chain, from semiconductor design and manufacturing to smartphone production and display technology. The company also develops software and services for its devices, including the Android-based One UI interface for smartphones and SmartThings platform for smart home devices.
Implication: Samsung’s vertical integration enables it to innovate across multiple product categories, differentiate its offerings, and capture market share in diverse industries. By controlling key components like processors, memory chips, and displays, Samsung maintains a competitive edge and drives technological advancements in the electronics market.
Horizontal Integration:
Facebook, Inc.:
Description: Facebook has pursued horizontal integration by acquiring and integrating various social media platforms and digital services into its ecosystem.
Method: Facebook’s acquisitions include Instagram, WhatsApp, and Oculus VR, among others. By integrating these platforms into its core offerings, Facebook expands its user base, enhances engagement, and diversifies its revenue streams. For example, Instagram’s photo-sharing platform complements Facebook’s social networking service, while WhatsApp provides messaging and communication tools.
Implication: Facebook’s horizontal integration strategy allows it to consolidate its position as a dominant player in the social media and digital communication market. By acquiring complementary services and integrating them into its ecosystem, Facebook strengthens its competitive advantage and maintains relevance in an evolving digital landscape.
Alphabet Inc. (Google):
Description: Alphabet, Google’s parent company, has pursued horizontal integration by expanding its portfolio of products and services across various industries.
Method: Google’s acquisitions include companies like YouTube (video-sharing platform), Waze (navigation app), and Nest Labs (smart home devices). By integrating these services into its ecosystem, Google enhances its offerings and captures new market opportunities. For example, YouTube complements Google’s search and advertising business, while Waze provides real-time navigation and traffic information.
Implication: Alphabet’s horizontal integration strategy allows it to diversify its revenue streams and extend its reach into adjacent markets. By acquiring companies with complementary products and services, Alphabet strengthens its position as a leading provider of digital services and maintains innovation across multiple industries.
Microsoft Corporation:
Description: Microsoft has pursued horizontal integration by expanding its portfolio of software products, cloud services, and digital platforms.
Method: Microsoft’s acquisitions include LinkedIn (professional networking), GitHub (software development platform), and Minecraft (gaming). By integrating these services into its ecosystem, Microsoft enhances its productivity tools, developer resources, and gaming experiences. For example, LinkedIn complements Microsoft’s enterprise offerings, while GitHub provides tools for software developers.
Implication: Microsoft’s horizontal integration strategy allows it to broaden its product portfolio and address diverse customer needs. By acquiring companies with complementary expertise and technologies, Microsoft strengthens its position in key markets and drives innovation across its ecosystem.
Amazon.com, Inc.:
Description: Amazon has pursued horizontal integration by expanding its e-commerce platform to include a wide range of products and services, as well as diversifying into various industries.
Method: Amazon’s acquisitions include companies like Whole Foods Market (grocery retail), Ring (home security), and Twitch (live streaming). By integrating these services into its ecosystem, Amazon enhances its offerings and captures new market segments. For example, Whole Foods Market complements Amazon’s online retail business, while Twitch provides a platform for gamers and content creators.
Implication: Amazon’s horizontal integration strategy allows it to diversify its revenue streams and enter new industries. By acquiring companies with complementary capabilities and customer bases, Amazon strengthens its position as a leading provider of e-commerce, cloud computing, and digital services.
Apple Inc.:
Description: Apple has pursued horizontal integration by expanding its ecosystem of products and services to include devices, software, digital content, and services.
Method: Apple’s acquisitions include companies like Beats Electronics (audio products), Shazam (music identification), and Texture (digital magazine subscription service). By integrating these services into its ecosystem, Apple enhances the user experience and expands its offerings. For example, Beats Electronics complements Apple’s hardware lineup with premium audio products, while Shazam enhances the music discovery experience for users.
Implication: Apple’s horizontal integration strategy allows it to strengthen its ecosystem of products and services and enhance customer loyalty. By acquiring companies with unique capabilities and content, Apple enriches its offerings and reinforces its position as a leader in consumer electronics and digital services.
Salesforce.com, Inc.:
Description: Salesforce has pursued horizontal integration by expanding its cloud-based CRM platform to include a wide range of business applications and services.
Method: Salesforce’s acquisitions include companies like Tableau Software (data visualization), Slack Technologies (collaboration software), and MuleSoft (integration platform). By integrating these services into its platform, Salesforce enhances its capabilities and provides comprehensive solutions for businesses. For example, Tableau Software complements Salesforce’s analytics offerings, while Slack Technologies enhances communication and collaboration for teams.
Implication: Salesforce’s horizontal integration strategy allows it to expand its portfolio of products and services and address diverse customer needs. By acquiring companies with complementary expertise and technologies, Salesforce strengthens its position as a leading provider of cloud-based business solutions.
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distribution to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.
Distribution represents the set of tactics, deals, and strategies that enable a company to make a product and service easily reachable and reached by its potential customers. It also serves as the bridge between product and marketing to create a controlled journey of how potential customers perceive a product before buying it.
A distribution channel is the set of steps it takes for a product to get in the hands of the key customer or consumer. Distribution channels can be direct or indirect. Distribution can also be physical or digital, depending on the kind of business and industry.
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through customers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.
By definition, a horizontal market is a wider market, serving various customer types, needs and bringing to market various product lines. Or a product that indeed can serve various buyers across different verticals. Take the case of Google, as a search engine that can serve various verticals and industries (education, publishing, e-commerce, travel, and much more).
A vertical or vertical market usually refers to a business that services a specific niche or group of people in a market. In short, a vertical market is smaller by definition, and it serves a group of customers/products that can be identified as part of the same group. A search engine like Google is a horizontal player, while a travel engine like Airbnb is a vertical player.
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution, or value. A product approach takes existing alternatives and it offers only the most valuable part of that product. A distribution approach cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.
Psychosizing is a form of market analysis where the size of the market is guessed based on the targeted segments’ psychographics. In that respect, according to psychosizing analysis, we have five types of markets: microniches, niches, markets, vertical markets, and horizontal markets. Each will be shaped by the characteristics of the underlying main customer type.
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all, can produce products that customers want.
Reintermediation consists in the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.
As startups gain control of new markets. They expand in adjacent areas in disparate and different industries by coupling the new activities to benefits customers. Thus, even though the adjunct activities might see far from the core business model, they are tied to the way customers experience the whole business model.
The bullwhip effect describes the increasing fluctuations in inventory in response to changing consumer demand as one moves up the supply chain. Observing, analyzing, and understanding how the bullwhip effect influences the whole supply chain can unlock important insights into various parts of it.
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.
Consumer-to-manufacturer (C2M) is a model connecting manufacturers with consumers. The model removes logistics, inventory, sales, distribution, and other intermediaries enabling consumers to buy higher quality products at lower prices. C2M is useful in any scenario where the manufacturer can react to proven, consolidated, consumer-driven niche demand.
Transloading is the process of moving freight from one form of transportation to another as a shipment moves down the supply chain. Transloading facilities are staged areas where freight is swapped from one mode of transportation to another. This may be indoors or outdoors, depending on the transportation modes involved. Deconsolidation and reconsolidation are two key concepts in transloading, where larger freight units are broken down into smaller pieces and vice versa. These processes attract fees that a company pays to maintain the smooth operation of its supply chain and avoid per diem fees.
Break bulk is a form of shipping where cargo is bundled into bales, boxes, drums, or crates that must be loaded individually. Common break bulk items include wool, steel, cement, construction equipment, vehicles, and any other item that is oversized. While container shipping became more popular in the 1960s, break bulk shipping remains and offers several benefits. It tends to be more affordable since bulky items do not need to be disassembled. What’s more, break bulk carriers can call in at more ports than container ships.
Cross-docking is a procedure where goods are transferred from inbound to outbound transport without a company handling or storing those goods. Cross-docking methods include continuous, consolidation, and de-consolidation. There are also two types of cross-docking according to whether the customer is known or unknown before goods are distributed. Cross-docking has obvious benefits for virtually any industry, but it is especially useful in food and beverage, retail and eCommerce, and chemicals.
The Toyota Production System (TPS) is an early form of lean manufacturing created by auto-manufacturer Toyota. Created by the Toyota Motor Corporation in the 1940s and 50s, the Toyota Production System seeks to manufacture vehicles ordered by customers most quickly and efficiently possible.
Six Sigma is a data-driven approach and methodology for eliminating errors or defects in a product, service, or process. Six Sigma was developed by Motorola as a management approach based on quality fundamentals in the early 1980s. A decade later, it was popularized by General Electric who estimated that the methodology saved them $12 billion in the first five years of operation.
Scientific Management Theory was created by Frederick Winslow Taylor in 1911 as a means of encouraging industrial companies to switch to mass production. With a background in mechanical engineering, he applied engineering principles to workplace productivity on the factory floor. Scientific Management Theory seeks to find the most efficient way of performing a job in the workplace.
Poka-yoke is a Japanese quality control technique developed by former Toyota engineer Shigeo Shingo. Translated as “mistake-proofing”, poka-yoke aims to prevent defects in the manufacturing process that are the result of human error. Poka-yoke is a lean manufacturing technique that ensures that the right conditions exist before a step in the process is executed. This makes it a preventative form of quality control since errors are detected and then rectified before they occur.
A Gemba Walk is a fundamental component of lean management. It describes the personal observation of work to learn more about it. Gemba is a Japanese word that loosely translates as “the real place”, or in business, “the place where value is created”. The Gemba Walk as a concept was created by Taiichi Ohno, the father of the Toyota Production System of lean manufacturing. Ohno wanted to encourage management executives to leave their offices and see where the real work happened. This, he hoped, would build relationships between employees with vastly different skillsets and build trust.
Jidoka was first used in 1896 by Sakichi Toyoda, who invented a textile loom that would stop automatically when it encountered a defective thread. Jidoka is a Japanese term used in lean manufacturing. The term describes a scenario where machines cease operating without human intervention when a problem or defect is discovered.
The andon system alerts managerial, maintenance, or other staff of a production process problem. The alert itself can be activated manually with a button or pull cord, but it can also be activated automatically by production equipment. Most Andon boards utilize three colored lights similar to a traffic signal: green (no errors), yellow or amber (problem identified, or quality check needed), and red (production stopped due to unidentified issue).
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
