Horizontal Integration vs. Vertical Integration: Key Differences (2024)

Horizontal Integration vs. Vertical Integration: An Overview

Horizontal integration and vertical integration are growth strategies that companies use to consolidate their positions and set themselves apart from their competitors. Both involve the acquisition of other businesses. While either strategy can help companies expand, there are important differences between the two.

In horizontal integration, a business grows by purchasing related businesses—namely, its competitors. In vertical integration, on the other hand, a business acquires another company in order to give it greater control over the stages in its supply or distribution chain.

How Horizontal Integration Works

Horizontal integration is a growth strategy that many companies use to boost their position within their industries and get an edge on their competition. They do this by taking over another company that operates at the same level of thevalue chain. This means both companies offer similar (if not the same) goods and services, and deal with a similar customer base.

For example, if a department store chain wants to expand its footprint, buying another chain in a different city, state, or country is one way to go about it. Doing so would provide the purchaser with more revenue and allow it to reach a wider market.

Horizontal integration also allows companies to cut down on their costs by sharing technology, marketing efforts, , production, and distribution. So, ideally, the expanded department store chain would be more profitable than the two chains were when they operated separately.

How Vertical Integration Works

Vertical integrationis a strategy that involves growth through the acquisition of a producer, vendor, supplier, distributor, or other related company that the acquirer may already be doing business with. Companies that choose to integrate vertically do so to strengthen their supply chain, reducetheir production costs, capture upstream or downstream profits, or access newdistribution channels.

There are two basic types of vertical integration:

• Backward integration occurs when a company decides to buy another business that makes an input product for the acquiring company's product. For example, a car manufacturer pursues backward integration when it acquires a tire manufacturer.
• Forward integration occurs when a company decides to take control of some aspect of the post-production process. So, that car manufacturer might acquire an automotive dealership to sell the vehicles it produces. This gets the manufacturer closer to the consumer and also provides it with additional revenue.
  

Advantages and Disadvantages of Horizontal Integration vs. Vertical Integration

Both horizontal and vertical integration have their pros and cons.

Horizontal integration: pros and cons

While there can be many benefits to horizontal integration, the primary ones include:

• Access to a larger customer base
• Greater revenue
• Reduced costs through economies of scale
• Taking a competitor off the playing field

Even though a horizontal integration may make sense from a business standpoint, however, there are potential downsides for consumers. For that reason, this strategy can face a high level of scrutiny from government regulators, who may invoke antitrust laws to stop it from happening.

Specifically:

• Merging two companies in the same industry cut downs on competition and can reduce the choices available to consumers.
• It may lead to a monopoly where one company controls the availability, prices, and supply of products and services.
• The new, larger company may take advantage of its dominance by raising prices and narrowing product options.

In addition to those potential obstacles, creating a larger company may result in increased bureaucracy and reduced flexibility. There is also a significant chance of failure if there isn't synergistic energy between the two companies and their cultures clash.

Vertical integration: pros and cons

Vertical integration can help a company:

• Reduce costs across different stages of its production process
• Maintain tighter quality control and a better flow of information across thesupply chain
• Increase sales
• Improve profits
• Reduce or eliminate the leverage that certain suppliers have over the company (backward integration)

The drawbacks of vertical integration include:

• A concentration of resources in one approach
• Increased risk when market environments are uncertain
• High costs to coordinate the strategy, including the potential of additional debt

Horizontal Integration Examples

• Marriott and Starwood Hotels. Marriott International (MAR) acquired Starwood in 2016, creating the world's largest hotel company. While Marriott already had a solid presence in the luxury, convention, and resort segments, Starwood's international presence was very strong. The merger offered greater choice for consumers, more opportunities for employees, and added value for shareholders. The combined companies had approximately 5,500 hotels and 1.1 million rooms worldwide after the merger was completed.
• Anheuser-Busch InBev and SABMiller. Finalized in October 2016 with a valuation of $100 billion, the new company now trades under the name Newbelco. Each company had to agree to sell off many of its popular beer brands, such as Peroni and Grolsch, in order to comply with antitrust laws before the merger was approved. One of the goals was to increase Anheuser-Busch InBev's market share in developing regions of the world, such as China, South America, and Africa, where SABMiller already had established access to those markets.
• Walt Disney Company and 21st Century Fox. Disney's (DIS) acquisition of 21st Century Fox was finalized in March 2019. The goal was to increase Disney's content and entertainment options, expand internationally, and grow its direct-to-consumer offerings, including ESPN+, Disney+, and the two company's combined ownership stake in Hulu. The deal also included Twentieth Century Fox, Fox Searchlight Pictures, Fox 2000 Pictures, Fox Family and Fox Animation, Twentieth Century Fox Television, FX Productions and Fox21, FX Networks, National Geographic Partners, Fox Networks Group International, Star India, and Fox’s interests in Hulu, Tata Sky, and Endemol Shine Group.
  

Vertical Integration Examples

• Google and Motorola. Alphabet's Google (GOOG) acquired Motorola Mobility in 2012. Motorola had created the first cell phone and invested in Android technology that was valuable for Google.
• Ikea and forests in Romania. The Swedish furniture giant bought an 83,000 acre woodland in northeastern Romania in 2015. It was the first effort the company made at managing its own forest operations. IKEA said it purchased the forest in order to manage wood sustainably at affordable prices.
• Netflix produces its own content. Netflix (NFLX) is one of the most significant examples of vertical integration in the entertainment industry. Prior to starting its own content studio, Netflix was at the end of the supply chain because it distributed films and television shows created by other companies. But Netflix realized it could generate more revenue and be less dependent on others if it were to create its own programming. In 2013, the company released its first original content in the form of four new series.

The Bottom Line

Horizontal integration and vertical integration are two different growth strategies that can help companies expand their business. Although the ultimate goals may be the same, there are important differences between the two strategies. Horizontal and vertical integration also have potential downsides that companies need to consider before embarking on either of them.