Horizontal & vertical integration strategy: Meaning | Types

An integration strategy refers to a company’s approach to aligning its operations with another company. This typically happens after a merger or acquisition but could also occur when forming a strategic alliance or joint venture.

An integration strategy aims to ensure that the two companies’ operations, cultures, systems, and processes are successfully combined to realize the benefits of the merger or acquisition. These benefits include cost savings, increased market share, access to new markets, or improved capabilities.

There are several types of integration strategies, including:

Horizontal Integration Strategy: As discussed earlier, this involves acquiring or merging with companies operating in the same or similar production stage in the same industry. The goal is to expand market share, reduce costs, diversify product or service offerings, or gain a competitive edge.
Vertical Integration Strategy: This refers to acquiring or merging with companies at different stages of production or distribution in the same industry. The aim is to gain greater control over the supply chain, improve efficiencies, reduce costs, or secure access to key resources or distribution channels.
System Integration Strategy refers to integrating various technological systems, applications, and processes to ensure they work together effectively. This can be critical in mergers and acquisitions where the involved companies may have different IT systems.
Cultural Integration Strategy: This strategy involves aligning the corporate cultures of the two merging companies. This is often a critical aspect of successful integration, as cultural differences can lead to conflicts and misunderstandings that undermine the benefits of the merger or acquisition.

The specific integration strategy that a company uses will depend on the nature of the companies involved, the goals of the merger or acquisition, and the particular challenges and opportunities presented by the integration. In reality, most companies must combine these strategies to integrate a new acquisition or merger successfully. In this article, we will only cover vertical and horizontal integration strategies.

Horizontal integration strategy Meaning

Horizontal integration is a strategy where a company acquires, merges with, or creates alliances with other companies in the same or similar production stage in the same industry. The main purpose of this type of integration is to increase market share, reduce costs, expand into new segments, or gain competitive advantages over rivals.

There are several reasons a business might choose a horizontal integration strategy:

Increase Market Share: A company can increase its market share by acquiring or merging with a competitor. This may give it more influence over suppliers or customers and potentially result in higher profits.
Economies of Scale: By combining operations, two businesses can achieve cost savings through economies of scale, for example, by purchasing raw materials in larger quantities for a lower price or combining production facilities to reduce overheads.
Access to New Markets: A horizontal integration strategy might also be used to gain access to new geographical markets that the company couldn’t reach on its own.
Reducing Competition: If a company buys out its competitors, it reduces competition in the market.
Improve Product/Service Offering: It could also diversify a company’s product or service offering by integrating with a company that produces complementary products or services.

While horizontal integration can provide significant benefits, it is also associated with some risks, such as increased exposure to market volatility, potential antitrust legal issues, and challenges in managing larger, more complex businesses.

Type of horizontal integration

Horizontal integration can take several forms, depending on companies’ specific strategies to expand their operations or influence within their industry. These can include:

Merger: This is when two companies combine to form a new entity. In a merger, both companies cease to exist independently and instead form a completely new organization.
Acquisition: This is when one company buys another. The acquired company becomes a part of the acquiring company and ceases to exist as an independent entity. Merger & Acquisition (M&A) Strategies Explained
Joint Venture: This is when two companies form a new entity together, contributing resources and sharing risks and rewards. This differs from a merger because the original companies continue to exist independently outside the joint venture. Joint Venture: Meaning | Types | Examples
Alliances or Partnerships: These are cooperative agreements between businesses. For example, two businesses might agree to share distribution networks, technology, or other resources for mutual benefit. Unlike in a joint venture, no new entity is created. Strategic Alliance: Meaning, Types & Examples
Consolidation: This is similar to a merger but typically involves multiple companies combining to form a completely new entity.

The type of horizontal integration a company chooses will depend on its specific goals, the opportunities available in the market, and the regulatory environment. It’s important to note that all forms of horizontal integration can carry risks, such as regulatory scrutiny, cultural clashes between combined organizations, and financial risks, so careful planning and execution are crucial for success.

Examples of Horizontal integration

There are numerous examples of horizontal integration throughout various industries. Here are a few:

Disney and Pixar: In 2006, Disney acquired Pixar Animation Studios. Both companies were in the business of creating animated films, making this a classic example of horizontal integration. The merger allowed Disney to expand its film portfolio and gain access to Pixar’s technology and creative talent.
Facebook and Instagram: In 2012, social networking company Facebook purchased Instagram, another social networking platform, intending to expand its user base and enhance its photo-sharing capabilities. This horizontal integration also eliminated a potential competitor.
Exxon and Mobil: In 1999, these two oil companies merged to form ExxonMobil. The merger was a strategic move to consolidate resources and increase market share in the energy sector.
Google and YouTube: Google’s acquisition of YouTube in 2006 is an example of horizontal integration in the digital space. Both companies were involved in the online advertising market, and the acquisition allowed Google to augment its video capabilities.
Sirius Satellite Radio and XM Satellite Radio: North America’s leading satellite radio providers merged in 2008, forming SiriusXM. The merger allowed the companies to avoid competition and expand their subscriber base.
Daimler-Benz and Chrysler: In 1998, these two automakers merged in a horizontal integration move. The merger was meant to strengthen their position in the global market by combining resources and reducing competition, although it was eventually deemed unsuccessful, and the companies separated in 2007.

These examples show how horizontal integration can be used to expand a company’s market presence, acquire new technologies or capabilities, and/or reduce competition.

Vertical integration strategy Meaning

Vertical integration is a business strategy where a company takes control of more than one stage in the production or distribution of a product, from sourcing raw materials to retailing the final product. It’s about gaining control over different levels of the supply chain, aiming to increase efficiency, reduce costs, or gain more control over the market.

Vertical integration can offer several advantages:

It allows companies to reduce costs by eliminating the need for a ‘middle-man’ and gaining more control over the quality of their raw materials.
It may allow companies to secure access to scarce resources or important distribution channels.
It can help protect companies from market fluctuations and uncertainties.
It can provide a company with a more secure supply of inputs or distribution outlets, enabling it to operate more efficiently.

However, vertical integration is not without its risks and disadvantages:

It often requires a significant investment of capital.
It can make the company less flexible by tying it to integrated channels.
It can lead to anti-competition concerns if it significantly reduces competition in the market.
It might lead to a decreased focus on the core business if the company becomes too diversified.

Some notable examples of vertical integration include Apple’s control over almost every aspect of its product creation and distribution, from the design and manufacturing of its devices to the distribution via its own Apple Stores and the digital services it offers on its App Store. Another example is Amazon’s creation of AmazonBasics (its line of products), its acquisition of Whole Foods (retail), and its development of its delivery network.

Type of vertical integration

Vertical integration can take two main forms:

Forward Integration: This strategy involves taking control of the supply chain elements closer to the end customer. Forward integration consists in taking over distribution or retailing aspects and moving down the supply chain. For example, a car manufacturer might own its car dealerships, ensuring better control over how its cars are sold.
Backward Integration: This strategy involves taking control of the elements of the supply chain that are closer to the raw materials or initial stages of production, essentially moving up the supply chain. For instance, a clothing retailer might purchase a fabric manufacturing plant, giving them more control over the production of the textiles they use.

Forward & Backward Integration Strategy: Meaning | Types | Examples

There’s also a third, less common form:

Balanced (or Hybrid) Integration: This is a blend of forward and backward integration, where a company controls parts of the supply chain in the direction of raw materials and toward the end customer. This might involve owning sources of raw materials, production facilities, distribution networks, and retail outlets.

The type of vertical integration a company chooses depends on the industry, the specific nature of the company’s products or services, and the company’s overall strategic goals. Each type of integration has its own potential benefits and drawbacks. Forward integration can improve distribution efficiency and customer service but might also alienate independent distributors. Backward integration can ensure a more reliable or cost-effective supply of inputs but also involve significant capital expenses and management challenges.

Examples of vertical integration

Here are a few examples of vertical integration:

Apple Inc.: Apple is a notable example of a company that practices vertical integration. The company designs its own hardware and software, produces its own devices, operates its own logistics network, and sells these products through its retail stores and online platform.
Amazon.com Inc.: Amazon started as an online book retailer but quickly expanded into selling a wide range of products. It has since vertically integrated by launching its products under Amazon Basics, acquiring Whole Foods grocery store chain, and developing its distribution and delivery network.
Zara: The fashion retailer Zara, part of the Inditex group, is a good example of a company using vertical integration. Zara controls most of the steps in its supply chain, from design and production to distribution and retail.
Netflix: Originally a DVD rental service, Netflix pivoted to streaming and eventually began producing its content. By creating its shows and movies, Netflix has implemented a form of vertical integration, allowing it greater control over its content library.
Starbucks: Starbucks is another company that practices vertical integration. It owns the entire supply chain, from owning the coffee farms, handling distribution, and finally, to the point of sale in the coffee shops.

These examples highlight how vertical integration can allow companies to gain more control over their supply chains, increase efficiencies, and improve their competitive position in the market.