Difference Between Horizontal vs Vertical Integration
In the business world, there is a dog-eat-dog situation playing out every day. As a result, the players continue to strategize and re-strategize in a concerted effort to outsmart to stand out. One approach they often employ to stay ahead of others is expansion.
Over the course of expansion, they keep on trying new ideas and game plans. More often than not, they embrace integration. Interestingly enough, it happens in two distinctive ways: horizontal and vertical.
Do you know what those mean? If you do not know, you do not have to sweat it as you will learn that in this tutorial. Before getting into the difference between horizontal and vertical integration, you have to understand the terms.
Definition of Horizontal Integration
Horizontal integration is defined as a strategy that entails an enterprise acquiring a service provider in an effort to expand its footprints. Entrepreneurs who have given this approach a try in the past did so by outright acquisition, merger, and internal expansion.
One takeaway here is that two enterprises do it for the benefit, chiefly to monopolize the entire market. Indeed, some organizations gave this plan a shot, and it paid off in no small measure. When an organization acquires or merges with a major player, they kill the concept of variety being the spice of life.
All over the world, many organizations have employed this plan to become stronger and difficult to beat. For instance, the biggest social media platform, Facebook, acquired a rival, Instagram, in 2012. The idea was to ensure that it controlled the entire market.
It is crystal clear that they are both social media platforms that were in rivalry before the acquisition. Well, the implication is that Facebook does not have to worry about what happens at Instagram because it now owns the latter. No doubt, the strategy plays out every now and then.
Definition of Vertical Integration
Vertical integration is defined as a strategy whereby a company controls every single part of its value chain starting from supply to distribution. Here, the organization will have its suppliers, distributors, and retail locations.
In other words, those units of production and sales do not work as independent contractors but as part of the big corporate entity. If an enterprise adopts this method, it means that it controls the entire value chain, including acquiring a firm to form a part of its broad production units. The benefits abound.
For instance, it can change of the entire production process, determine cost, improve efficiencies, etc. Without a doubt, employing this method means that the organization must have enough financial muscle and expertise for making informed decisions.
Before learning the difference between vertical and horizontal integration, an example of the former will make the concept clearer. Well, a good example of an organization that embraced this technique is the leading paywalled streaming site, Netflix.
Though the media giant started as a DVD maker, it expanded to streaming. The firm programs its content and distributes licensed flicks in the comfort of its studios.
Main Differences Between Horizontal vs Vertical Integration
The table below gives more insight into the vertical vs horizontal integration subject:
|Basis for Comparison||Horizontal Integration||Vertical Integration|
|Meaning||Two firms combine to end rivalry, share expertise, and rake in more revenue.||An establishment acquires another that forms a significant part of its production process to become much bigger|
|Objectives||– Share expertise|
– Stop rivalry
– Ramp up their revenues
|Make its supply chain robust|
|Impact||Kills competition and limits buyers’ choices||Reduces production cost and wastage|
|Funds involved||It requires a lot of money. For instance, Facebook acquired Instagram for $1 billion||It does not require much money|
|Self sufficiency||The establishment is not necessarily self-sufficient||The firm becomes self-sufficient|
|Control||Capture the market||Have a robust footing on its industry|
Difference Between Horizontal and Vertical Integration: Conclusion
In summary, you can see that entrepreneurs continue to make efforts to have edge over their rivals. However, this horizontal vs vertical integration guide has shown that they do it in different ways.
While the former focuses on combining to take over the market, the latter concentrates on running its entire industry. These are the two major ways they expand.