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.|
Quick glance at Vertical Integration
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
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)
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.
- 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.
- 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
- Manufactures its hardware.
- Develops its software (iOS).
- Runs its retail stores (Apple Stores).
- Owns the platform for digital goods (App Store).
- Started as a content distributor.
- Moved into content creation (e.g., “Stranger Things”, “The Crown”).
- Controls its streaming technology.
- Started as an online retailer.
- Acquired Whole Foods to enter physical retail.
- Runs its logistics network (Amazon Prime delivery trucks).
- Acquired Pixar, Marvel, Lucasfilm, and 21st Century Fox to expand its content portfolio.
- Acquired LinkedIn and GitHub to expand its enterprise services.
- Acquired Tropicana and Quaker Oats to diversify its product range.
Connected Business Concepts And Frameworks