This method of growth works best when the two companies have synergistic cultures and customers. Even when two companies sell a similar product to a similar product, the merger may fail if there are problems merging the two company cultures. Other businesses choose to expand by acquiring a company that occupies a critical place in their supply chain process. This includes raw materials sourcing, product manufacturing, transportation, distribution or retailing.
Vertical integration can also be the degree to which a firm owns its upstream suppliers backward integration and its downstream buyers forward integration. Businesses do this to secure the supplies, distribution points or other parts of the transaction necessary to produce or market products or services at a lower or more predictable price. For example, an auction site purchasing a payment company to capture the revenue stream that comes from the fee of paying online.
The synergies involved in vertical integration are not always successful. Sometimes the two companies have uneven requirements of how much product or service needs to flow through their part of the supply chain. Vertical integration also means making a commitment to a particular company, technology or process. This can result in a lack of flexibility when market trends change. Deciding between horizontal and vertical integration?
Here are some of the elements a company should consider. A business can pursue horizontal integration when it operates in a growing industry and its competitors lack some of the competencies or financial resources it possesses. It is typically successful when economies of scale of an existing process would have a significant effect on profit.
Please remember that the acquiring or merging organizations need to have the financial resources to manage this process. HI is different from vertical integration , where a firm usually expands into another production stage rather than merging or acquiring the company in the same production stage.
For example, a company is vertically integrating if it expands from manufacturing industry to retailing industry, while HI would mean buying other firms in the same manufacturing industry. Save my name and email in this browser for the next time I comment. Definition Horizontal integration is the process of acquiring or merging with competitors, leading to industry consolidation.
What is horizontal integration? HI may be an effective strategy when: Organization competes in a growing industry. Competitors lack of some capabilities, competencies, skills or resources that the company already possesses. HI would lead to a monopoly that is allowed by a government. Economies of scale would have significant effect. The following diagram illustrates HI in manufacturing industry: Difference between horizontal and vertical integrations HI is different from vertical integration , where a firm usually expands into another production stage rather than merging or acquiring the company in the same production stage.
Horizontal integration examples Acquiring company Acquired company Amazon. The result of HI is one larger company, which produces more services and products. This kind of strategy faces a high level of scrutiny from government agencies. Merging two companies that operate within the same supply chain can cut down on competition, thereby reducing the choices available to consumers. If that happens, it may lead to a monopoly, where one company plays a dominant force, controlling the availability, prices, and supply of products and services.
Big mergers like these are the reason why antitrust laws are in place. Antitrust laws are intended to prevent predatory mergers and acquisitions that may create a monopoly. After horizontal integration, the new, larger company may take advantage of consumers by raising prices and narrowing product options. In addition, there are other potential drawbacks to horizontal integration, including reduced flexibility within the new organization.
Prior to horizontal integration, the two companies may have been able to operate more nimbly, but now the new company is a larger organization. With more employees and internal processes, a company is now beholden to more bureaucracy and a greater need for transparency.
Finally, if there is not synergistic energy between the two companies, despite the costs of the process, horizontal integration can fail. This can result in a reduction of value between the two companies, rather than adding value to the operation.
Horizontal integration takes place when two companies that compete in the same industry and at the same stage of production merge. In , Marriott International, Inc. At the time, this created the world's largest hotel company. The goal of the merger was to create a more diverse portfolio of properties for the company. While Marriott had a strong presence in the luxury, convention, and resort segments, Starwood's international presence was very strong.
The combination of the two companies created more choices for consumers as guests of the hotel franchise , more opportunities for employees, and added value for the company's shareholders. After combining, the two companies had approximately 5, hotels and 1.
The new company now trades under one name, Newbelco. One of the goals of the merger 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. A company that undergoes vertical integration acquires a company operating in the production process of the same industry.
Some of the reasons why a company may choose to integrate vertically include strengthening its supply chain, reducing production costs, capturing upstream or downstream profits, or accessing new distribution channels.
To accomplish this, one company acquires another that is either before or after it in the supply chain process. Companies may achieve vertical integration through internal expansion, an acquisition, or a merger.
Not only does vertical integration increase profits from the newly acquired operations by selling its products directly to consumers, but it also guarantees efficiencies in the production process and cuts down on delays in delivery and transportation. Companies can integrate vertically in two ways: backward or forward. Backward integration occurs when a company decides to buy another company that makes an input product for the acquiring company's product.
For example, a car manufacturer is pursuing backward integration when it acquires a tire manufacturer. Forward integration occurs when a company decides to take control of the post-production process. So, the car manufacturer in the previous example may acquire an automotive dealership through the process of forward integration—acquiring a business ahead of its own supply chain.
This gets the manufacturer closer to the consumer and gives the company more revenue. Vertical integration helps a company to reduce costs across different parts of its production process.
It also creates tighter quality control and guarantees a better flow and control of information across the supply chain.
Further benefits of vertical integration include increasing sales and improving profits. Backward integration—when a company purchases another company that makes an input product for the acquiring company's product—can reduce or eliminate the leverage that suppliers have over the company, and thus, can reduce costs. One of the major drawbacks of vertical integration is that a company can end up with all of its resources concentrated in one approach.
This strategy can be especially risky in an uncertain market environment. In addition, there are high costs in coordinating a vertical integration. Any company that is considering a vertical integration strategy should be aware of the capital that it takes to finance an acquisition.
If this strategy requires taking on additional debt, a company should proceed with the knowledge that it must be able to pay for that debt through the additional revenue generated by the integration. Vertical integration takes place when a company acquires some or all of the players within its supply chain. Three examples of vertical integration are Google's acquisition of the smartphone producer Motorola in , IKEA's purchase of forests in Romania to supply its own raw materials in , and Netflix's foray into creating its own original content that it would distribute through its streaming service.
In , Google acquired Motorola Mobility. Motorola created the first cell phone and had invested in Android technology that was valuable for Google. It was the first effort the company had made at managing its own forest operations. IKEA purchased the forest in order to manage wood sustainably at affordable prices.
Netflix 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 content creators. However, Netflix leaders realized they could generate greater revenue by creating their own original content. In , the company expanded its original content offerings.
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