horizontal-vs-vertical-integration

Horizontal Vs. Vertical Integration In A nNutshell

Business / By / November 14, 2023

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.

AspectHorizontal IntegrationVertical Integration
DefinitionHorizontal 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.
FocusThe 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.
TypesHorizontal 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.

Quick glance at Vertical Integration

vertical-integration
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

vertically-integrated-business-model

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-feature-phone-business-model
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

types-of-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-business-model
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:
    • Manufactures its hardware.
    • Develops its software (iOS).
    • Runs its retail stores (Apple Stores).
    • Owns the platform for digital goods (App Store).
  • Netflix:
    • Started as a content distributor.
    • Moved into content creation (e.g., “Stranger Things”, “The Crown”).
    • Controls its streaming technology.
  • Amazon:
    • Started as an online retailer.
    • Acquired Whole Foods to enter physical retail.
    • Runs its logistics network (Amazon Prime delivery trucks).

Horizontal Integration:

  • Disney:
    • Acquired Pixar, Marvel, Lucasfilm, and 21st Century Fox to expand its content portfolio.
  • Microsoft:
    • Acquired LinkedIn and GitHub to expand its enterprise services.
  • PepsiCo:
    • Acquired Tropicana and Quaker Oats to diversify its product range.

Connected Business Concepts And Frameworks

Supply Chain

supply-chain
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.

Data Supply Chains

data-supply-chain
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

whats-distribution
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.

Distribution Channels

distribution-channels
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.

Vertical Integration

vertical-integration
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 vs. Vertical Integration

horizontal-vs-vertical-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. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.

Horizontal Market

horizontal-market
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).

Vertical Market

vertical-market
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.

Entry Strategies

entry-strategies-startups
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

backward-chaining
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.

Market Types

market-types
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.

Market Analysis

market-analysis
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.

Decoupling

decoupling
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

disintermediation
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

reintermediation
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.

Coupling

coupling
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.

Bullwhip Effect

bullwhip-effect
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

dropshipping-business-model
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

consumer-to-manufacturer-c2m
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

transloading
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

break-bulk
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

cross-docking
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.

Toyota Production System

toyota-production-system
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

six-sigma
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

scientific-management
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

poka-yoke
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.

Gemba Walk

gemba-walk
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

jidoka
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.

Andon System

andon-system
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).

Read Also: Vertical Integration, Horizontal Integration, Supply Chain.

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About The Author

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.
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