For example, a supermarket may acquire control of farms to ensure supply of fresh vegetables backward integration or may buy vehicles to smoothen the distribution of its products forward integration. A car manufacturer may acquire tyre and electrical-component factories backward integration or open its own showrooms to sell its vehicle models or provide after-sales service forward integration. There is a third type of vertical integration, called balanced integration, which is a judicious mix of backward and forward integration strategies.
Credit: strategicmanagementinsight. Several factors affect the decision-making that goes into backward and forward integration. A company may go in for these strategies in the following scenarios:. What are the benefits of vertical integration? Let us take the example of a car manufacturer implementing this strategy.
This company can. But what is the downside? What are the drawbacks of vertical integration? Let us see the main disadvantages. Businesses do this to secure the supplies, distribution points or other parts of the transaction necessary to produce or market products or services at a lower or more predictable price.
For example, an auction site purchasing a payment company to capture the revenue stream that comes from the fee of paying online. The synergies involved in vertical integration are not always successful. Sometimes the two companies have uneven requirements of how much product or service needs to flow through their part of the supply chain. Vertical integration also means making a commitment to a particular company, technology or process. This can result in a lack of flexibility when market trends change.
Deciding between horizontal and vertical integration? Here are some of the elements a company should consider. A business can pursue horizontal integration when it operates in a growing industry and its competitors lack some of the competencies or financial resources it possesses. It is typically successful when economies of scale of an existing process would have a significant effect on profit. Please remember that the acquiring or merging organizations need to have the financial resources to manage this process.
A company can pursue vertical integration when it can increase its profits by obtaining better control of its operations. Horizontal integration refers to the expansion strategy adopted by the corporations which involves acquisition of one company by another company where both the companies are in the same business line and at same value chain supply level, whereas, Vertical integration refers to the expansion strategy adopted by the corporations where one company acquire another company who is at the different level, usually at the lower level of its value chain supply process.
But easier said than done, this has never been a sprint but a marathon. Such expansions in the business world require a lot of resources in terms of finances, human capital, and, most importantly, a business expansion strategy. There are many strategies that companies employ in order to establish their place amongst its peers in the market, but at a high level, they can be grouped into two, namely Horizontal and Vertical Integration.
Horizontal Integration is a type of business expansion strategy, which comprises a company acquiring other companies from the same business line or at the same level of the value chain so as to subside competition. You are free to use this image on your website, templates etc, Please provide us with an attribution link How to Provide Attribution? Vertical Integration Vertical Integration Vertical integration is a corporate approach to take charge of its value chain or supply chain functions.
It is the process of holding and managing the distributors, suppliers and retail locations at the company's discretion. They can invest in the retail end of the process by opening websites and physical stores. They can invest in warehouses and fleets of vans to control the distribution process. All of these steps involve a substantial investment of money to set up facilities and hire additional talent and management.
Vertical integration also ends up increasing the size and complexity of the company's operations. There are a number of ways that a company can achieve vertical integration. Two of the most common are backward and forward integration. Backward Integration. A company that chooses backward integration moves the ownership control of its products to a point earlier in the supply chain or the production process.
It still does that, but it also has become a publisher. The company eventually branched out into thousands of branded products. Then it introduced its own private label, Amazon Basics, to sell many of them directly to consumers.
Forward Integration. A company that decides on forward integration expands by gaining control of the distribution process and sale of its finished products. A clothing manufacturer can sell its finished products to a middleman, who then sells them in smaller batches to individual retailers.
Or, the manufacturer can open its own stores. The company will bring in more money per product, assuming it can operate its retail arm efficiently. Although vertical integration can reduce costs and create a more efficient supply chain, the capital expenditures involved can be significant.
Vertical integration can help a company reduce costs and improve efficiency. But the company's efforts can backfire. The fossil fuel industry is a case study in vertical integration. British Petroleum, ExxonMobil, and Shell all have exploration divisions that seek new sources of oil and subsidiaries that are devoted to extracting and refining it.
Their transportation divisions transport the finished product. Their retail divisions operate the gas stations that deliver their product.
The merger of Live Nation and Ticketmaster in created a vertically integrated entertainment company that manages and represents artists, produces shows, and sells event tickets. The combined entity manages and owns concert venues, while also selling tickets to the events at those venues. This is an example of forward integration from the perspective of Ticketmaster, and backward integration from the perspective of Live Nation. An acquisition is an example of vertical integration if it results in the company's direct control over a key piece of its production or distribution process that had previously been outsourced.
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