Both vertical integration and horizontal integration share the same purpose of maintaining or promoting competitiveness or competitive advantage through expansion. The two are also represent some of the reasons or motivations behind mergers and acquisitions. Both are still considered two different business strategies. The direction of expansion differs between the two.
The Difference Between Vertical Integration and Horizontal Integration
Definition and Examples of Vertical Integration
Vertical integration, by definition, involves an organization merging with another organization or acquiring another one that operates within the same sector or industry but serves a different market segment.
An example would be the German sports car manufacturer Porsche merging with another German automaker Volkswagen in 2009. Note that both operated within the same automotive industry but served two different segments in the automotive market. Porsche was also the main supplier of automotive parts of Volkswagen.
The acquisition of the Android operating system by Google in 2005 is another example of vertical integration. Google is a technology company offering digital products for different markets and segments. Its acquisition of Android enabled it to own a mobile operating system. This was instrumental in entering the smartphone market and introducing Google products to mobile users.
Nevertheless, based on the examples above, vertical integration is a strategy to either build or share capabilities. Hence, when an organization pursues this strategy, it usually merges with or acquires suppliers, distributors, partners, or other organizations that can help solidify its value chain.
Definition and Examples of Horizontal Integration
Horizontal integration, on the other hand, involves an organization merging with another organization or acquiring an existing one that operates within the same sector industry or the same market or segment.
The merger of American-based chip supplier Applied Materials and Japan-based chip supplier Tokyo Electron Limited in 2013 is an excellent example of a horizontal integration strategy. Take note that these two companies were once the two largest chip suppliers in the world.
However, chip customers like Intel and Samsung have been reducing their dependence on third-party chip suppliers by building their own technological and manufacturing capabilities. The trend shrunk both the customer bases and sales performances of companies like Applied Materials and Tokyo Electron.
Nevertheless, by merging, both Applied Materials and Tokyo Electron essentially combined their respective customer bases and market shares, while also combining their operational and technological capabilities to survive in the business and improve their bargaining power.
Takeaway: The Similarities Between Vertical Integration and Horizontal Integration
Note that the critical difference between vertical integration and horizontal integration is that they are two different strategies that lead to two different directions of expansion. Based on their names alone, vertical integration leads to a vertical expansion of an organization while a horizontal integration results in a horizontal expansion.
There are still similarities between the two. Remember that both vertical integration and horizontal integration strategies are similar in the sense that they enable an organization to maintain or promote its competitiveness through a more effective and efficient expansion. Both also represent two of the main motivations or reasons behind mergers and acquisitions.
It is also worth noting that vertical integration and horizontal integration are also two different market entry strategies. Vertical expansion can enable an organization to effectively enter new markets. Google demonstrated this when it acquired Android. Horizontal expansion allows a regional organization to enter a foreign regional market.
Both vertical integration and horizontal integration are also strategies for creating or increasing barriers to entry or for building economies of scale. Remember that the merger of Applied Materials and Tokyo Electron allowed them to combine their market shares and technological capabilities, thus creating economies of scale needed to produce more effectively and efficiently.
