Horizontal and Vertical Integration

Horizontal and vertical integration can give a business a competitive advantage.
Horizontal and vertical integration can give a business a competitive advantage. (Image: shironosov/iStock/Getty Images)

Horizontal and vertical integration are two strategies that businesses can use to improve their competitive position. In horizontal integration, one company acquires other companies operating in a similar market to increase their product range or reduce the number of competitors. Vertical integration is a strategy for securing essential supplies or increasing efficiency in the supply chain by acquiring key suppliers.

Increase Revenue and Market Share

Horizontal integration is an important strategy for businesses that want to increase their market share. By acquiring companies that offer different products or services to the same group of customers, businesses can expand their own market offering and increase their revenue and share of the market. Businesses may face antitrust legislation for restricting consumers' choices.

Diversify the Business

By providing more products and services through horizontal integration, businesses can also diversify. They may acquire product lines that enable them to serve different sectors of the same market, for example, or offer complementary products and services to existing customers. Horizontal integration may also enable a business to replace existing products with technically superior versions or versions that meet the requirements of niche markets.

Enter New Geographical Markets

Horizontal integration enables businesses to enter new geographic markets. A business that acquires a company with a distribution network in a different region or country can use that network to market its own products to new and prospective customers. The business can also use the local market knowledge it acquires to improve its own growth planning and market decision making.

Improve Costs and Efficiency

A vertical-integration strategy may allow businesses to reduce their manufacturing costs or improve the efficiency of their supply-chain operations. By acquiring key suppliers, they can reduce procurement costs. They may be able to make further savings by integrating production schedules so that suppliers deliver only when materials and components are needed, reducing stockholding costs. By sharing production schedules and market information with members of an integrated supply chain, businesses can respond faster to changes in demand or new market opportunities.

Control Supplies

Vertical integration also enables businesses to secure access to important supplies. A business may acquire a manufacturer of critical components or essential raw materials, for example. By controlling supplier access, businesses can also reduce the threat from competitors that depend on the same supplies.

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