Vertical integration is the process in which several steps in the production and/or distribution of a product or service are controlled by a single company or entity, in order to increase that company’s or entity’s power in the marketplace.
Simply said, every single product that you can think of has a big life cycle. While you might recognize the product with the Brand name printed on it, many companies are involved in developing that product. These companies are necessarily not part of the brand you see.
Example of vertical integration: while you are relaxing on the beach sipping chilled cold drink, the brand that you see on the bottle is the producer of the drink but not necessarily the maker of the bottles that carry these drinks. This task of creating bottles is outsourced to someone who can do it better and at a cheaper cost. But once the company achieves significant scale it might plan to produce the bottles itself as it might have its own advantages (discussed below). This is what we call vertical integration. The company tries to get more things under their reign to gain more control over the profits the product / service delivers.
Types of Vertical Integrations:
There are basically 3 classifications of Vertical Integration namely:
Backward integration – The example discussed above where in the company tries to own an input product company. Like a car company owning a company which makes tires. Forward integration – Where the business tries to control the post production areas, namely the distribution network. Like a mobile company opening its own Mobile retail chain. Balanced integration – You guessed it right, a mix of the above two. A balanced strategy to take advantages of both the worlds. What is Horizontal Integration?
Much more common and simpler than vertical integration, Horizontal integration (also known as lateral integration) simply means a strategy to increase your market share by taking over a similar company. This take over / merger / buyout can be done in the same geography or probably in other countries to increase your reach.
Examples of Horizontal Integration are many and available in plenty. Especially in case of the technology industry, where mergers and acquisitions happen in order to increase the reach of an entity.
As per me an apt example of Horizontal Integration will be You Tube, which was taken over my Google primarily because it had a strong and loyal user base. (There was no rocket science in technology used at Youtube which Google couldn’t have done without taking over, but yes to increase the viewers was definitely as complex without the takeover.)
Executing these strategies and key points to remembers
Vertical and Horizontal integration strategy generally can be done by businesses which have established themselves and probably have a stable life as compared to ones which have to address risks on a regular basis. The immediate advantage of implementing them is to
Have economies of scale
Expand your knowledge and capabilities
Increase market (and profits)
Own the whole life cycle so that you can change it the way required Reduce competition (by merging with them rather than competing) Provide better services
Many more (refer links below)
Vertical and horizontal integration is a significant factor in a firm’s strategy, since it can influence its costs, differentiation, and overall positioning within an industry.
Vertical integration refers to the value chain in an industry. The graphic above shows a manufacturing example, with five simple steps (from raw materials, to component manufacturing, to assembly, to distribution, to the end user). If a firm is currently active in the assembly segment of the value chain, vertical integration could either go backward (or upstream) buying a component manufacturer. Or it could go forward (downstream), leading the firm to buy a distributor in the industry.
Vertical integration can have a...
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