Every small business owner wants to grow their business, but sometimes doing that is more easily said than done. Sometimes you have to look outside of your business in order to bring in the expertise you need.
If you’re looking to expand and achieve growth goals, integrations are a huge help. Integrations offer businesses a way to expand their range of products or services without starting from scratch. This means you can build your business without the added cost and risk of starting over. But, we understand that deciding what type of integration to conduct can be a challenge.
This is where vertical and horizontal integrations come in. In a nutshell, horizontal integration happens when a company acquires or merges with a similar company. Vertical integration is when a business acquires or merges with a supplier or distributor. Each integration provides different benefits, and deciding between the two can be difficult.
In this article, we’ll explain the differences between vertical vs. horizontal integration and help you decide if one of these strategies can benefit your business.
Let’s dive in.
What is Horizontal Integration?
First, let’s cover the basics.
Horizontal integration is a business expansion strategy where a company acquires other enterprises that are operating in the same line of business. Essentially, it is a process that allows firms to expand their market share and increase their competitive edge.
Pros of Horizontal Integration
With this expansion strategy, a company can gain more control over various aspects of the supply chain, reduce competition, and also improve its economies of scale. A few pros of horizontal integration include:
- Increased sales force: By tapping into the existing customer base, horizontal integration allows a company to increase its sales force and grow its revenue base.
- Increased revenue sooner: By acquiring an already established firm, a company can accelerate its revenue growth and reduce the time it takes to achieve profitability.
- Augmented market share: By acquiring other companies, a firm can gain a larger share of the market and increase its overall presence in the industry.
- Achieved Synergies: By combining similar businesses, a company can leverage its expertise, resources, and talent to achieve operational and financial synergies.
Cons of Horizontal Integration
It’s not all sunshine and roses, though. Horizontal integration poses unique challenges, including:
- Poor cultural fit: The integration of two companies is not always smooth, as differences in company culture can often exist. This can lead to conflicts that can undermine the success of the integration process.
- Increased layoffs and reduced employee morale: The integration process often involves layoffs and job losses, which can lead to lower morale among employees and affect productivity.
- Process uncertainty: The integration process itself can be complex, leading to uncertainty and confusion, which can cause disruptions to operations and negatively impact customer satisfaction.
- Higher losses (if the industry slows down): Horizontal integration can be a high-risk strategy, especially if the industry experiences a slowdown. This can lead to significant losses, which can have serious implications for the company’s financial stability.
What is Vertical Integration?
Vertical integration involves acquiring other businesses within different stages of a value chain. This means that a company extends its reach beyond its core business by acquiring or merging with businesses that are either suppliers or customers in order to take control of the entire value chain.
Pros of Vertical Integration
Vertical integration can be a powerful tool for gaining greater control and profitability. Let’s take a look at some of the ways this strategy can benefit your business.
- Increased control over the supply chain: Vertical integration allows businesses to seamlessly manage different aspects of the supply chain, from production to customer delivery.
- Improved access to technology: By acquiring companies with advanced technologies or investing in R&D, businesses can gain access to new technologies and expertise that they might not have been able to develop on their own.
- Improved delivery of products: Integration across the supply chain helps businesses to streamline the entire process, leading to faster, more efficient delivery of products to customers.
- Improved quality control: By owning or controlling more aspects of the production process, businesses can oversee quality control measures more closely, which can lead to higher-quality products.
Cons of Vertical Integration
On the flip side, vertical integration can also come with several challenges, including:
- Loss of key talent from the acquired company: In mergers and acquisitions, businesses often lose valuable talent from the acquired company which can result in a loss of important expertise, knowledge, and relationships.
- Potential underperformance: If the business being acquired is not up to par with your internal processes or standards, it can drag down the entire supply chain and underperform.
- Increased responsibility: Owning more aspects of the supply chain means more responsibilities, such as managing relationships with suppliers and customers, which can become burdensome and time-consuming.
- Cultural challenges: Different companies often have different cultures and integrating them can lead to cultural conflicts that can be hard to solve.
Key Differences Between Vertical and Horizontal Integration
Now that you understand what horizontal and vertical integration are and how they can impact your business, it’s time to decide if one of these strategies is right for your business.
As with any big business decision, choosing between vertical and horizontal integration will depend heavily upon your business objectives, industry, and available resources. Both approaches can have benefits and drawbacks, and it’s important to weigh them carefully before making a decision.
Let’s review some key differences to help you decide which approach is right for your business.
1. Objectives
The objectives of vertical and horizontal integration are quite different. Vertical integration aims to increase control over the supply chain and reduce dependence on outside sources, while horizontal integration aims to expand market share and eliminate competition.
2. Capital Requirement
Depending on the industry and the size of the companies involved, vertical and horizontal integration can have different capital requirements. Vertical integration may require significant upfront investments to acquire and integrate suppliers or distributors, while horizontal integration may require significant funds to acquire competitors or merge with them.
3. Purpose
The purpose of vertical and horizontal integration can also vary. Vertical integration is typically pursued to improve efficiency, quality, and sustainability by integrating the supply chain. Horizontal integration is more focused on expanding the business by increasing market share and diversifying products/services.
4. Production Scale
Another difference between vertical and horizontal integration is the impact on production scale. Vertical integration typically leads to higher control over the production process. Horizontal integration, on the other hand, may lead to increased production capacity and greater economies of scale.
5. Risk
Finally, vertical and horizontal integration carry different risks for businesses. Vertical integration may increase exposure to supply chain disruptions or increase the complexity of operations. Horizontal integration may lead to increased competition or loss of focus on core competencies.
Horizontal and Vertical Integration Examples
By now you’re probably wondering: What does all of this look like in the real world? Here are some examples to help you better understand.
Horizontal Integration Examples
- Marriott and Starwood Hotels: In 2016, Marriott International acquired Starwood Hotels & Resorts Worldwide to become the world’s largest hotel company. This move allowed Marriott to expand its portfolio of hotel brands and gain access to Starwood’s loyalty program, which has over 84 million members.
- Walt Disney Company and Pixar: In 2006, Walt Disney Company acquired Pixar Animation Studios for $7.4 billion. This acquisition allowed Disney to strengthen its position in the animation industry and gain access to Pixar’s team of talented animators and technological innovation.
Vertical Integration Examples
- Google and Motorola: In 2012, Google acquired Motorola Mobility for $12.5 billion. This acquisition allowed Google to further integrate its Android operating system with Motorola’s hardware, creating a more seamless user experience. It also provided Google with access to Motorola’s patents, which helped protect Google’s intellectual property.
- Ikea and Forests in Romania: Ikea, the Swedish furniture retailer, bought a Romanian forest management company to secure its supply of sustainably sourced wood. This move allowed Ikea to manage the entire supply chain, from sourcing raw materials to manufacturing and retailing the final product, all while ensuring environmental sustainability.
Running a business is no joke—there are so many decisions to make, strategies to consider, tasks to manage, and people to keep happy. It can be overwhelming to say the least. The good news is that knowledge is power, and you don’t have to do it alone.
As you make big decisions regarding how you’ll expand your business, be sure to keep your resources, expertise, and customers in mind so you can come out on top.
Podium helps small businesses like yours scale efficiently and effectively. Interested in seeing what Podium can do for your business? Start a free trial today—it’s risk-free, no-strings-attached.
