If the company gains control over its suppliers through integration is called backward integration. The main objective is to minimize wastage and cost of products.
Production distribution chain is also strengthened by this integration. Intermediaries are also eliminated. Nagasravan Tamma. Previous Page Print Page. 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. Horizontal integration is an expansion strategy adopted by a company that involves the acquisition of another company in the same business line. Vertical integration refers to an expansion strategy where one company takes control over one or more stages in the production or distribution of a product.
Both of these strategies are undertaken by a company in order to consolidate its position among competitors. Horizontal integration is one of the most common types of mergers.
As a result of horizontal integration, competitors in the same market combine their operations and assets. An example of horizontal integration would be if two consulting firms merge. One of the firms offers software development services in the defense industry; the other firm also provides software development but in the oil and gas industry.
Companies that seek to strengthen their positions in the market and enhance their production or distribution stage use horizontal integration. Horizontal integration can greatly benefit companies. It is important because it can grow the company in size, increase product differentiation, achieve economies of scale, reduce competition, or help the company access new markets.
While horizontal integration and vertical integration are both ways that companies can expand their operations, there are important differences between the two strategies. Horizontal integration is the process of acquiring or merging with competitors, while vertical integration occurs when a firm expands into another production stage rather than merging or acquiring the company in the same production stage.
A-B InBev. The Walt Disney Company. Ikea Group. Accessed Dec. Corporate Finance. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.
We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Horizontal vs. Vertical Integration. Horizontal Integration. Pros and Cons of Horizontal Integration. Horizontal Integration Examples. Pros and Cons of Vertical Integration. The acquisition of additional business, that operates in the same line, increases market dominance and also reduce the intensity of competition.
Hence, it is a strategy to exercise control over market. I find the strategy quite interesting and demanding as well as complex.. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment.
Forms of vertical integration. Key Differences Between Horizontal and Vertical Integration The following are the major differences between horizontal and vertical integration: Horizontal Integration occurs between two firms whose product and production level are same.
Vertical Integration is an integration of two firms that operates in different stages of the manufacturing process. Horizontal Integration aims at increasing the size of business and scale of production, whereas Vertical Integration focuses on strengthening and smoothening its production-distribution process.
The greatest advantage of horizontal integration is that it eliminates competition between firms, which ultimately extends the market share of the company. Conversely, Vertical Integration results in lowering the cost of production and wastage. Horizontal Integration only brings synergy, but not self-sufficiency while Vertical Integration helps the company gain synergy with self-sufficiency. Horizontal Integration helps to acquire control over the market, but Vertical Integration is a strategy used for gaining control over the whole industry.
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