Difference between vertical integration and horizontal integration

Vertical Integration vs. horizontal Integration: Difference

Vertical integration and horizontal integration are two different business strategies with two different purpose or strategic goals and objectives. For starters, they are two different reasons or motivations behind mergers and acquisition. Their major similarity centers on the fact that both involve expanding an organization beyond its original scope.

Both strategies also have the purpose of maintaining or promoting competitiveness or competitive advantage as a result of the expansion. However, the way or direction of this expansion differs in either a vertical or horizontal integration strategy.

The Difference Between Vertical Integration and Horizontal Integration

Definition and Examples of Vertical Integration

By definition, vertical integration 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 of a vertical integration strategy 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 they serve two different segments in the automotive market. In addition, Porsche was 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 and services for different markets and segments. When it acquired Android, the company acquired its own mobile operating system needed to enter the smartphone market and introduce Google products and services to mobile users.

From the examples above, vertical integration is a strategy to either build or share capabilities. Hence, when an organization pursues this strategy, it usually mergers with or acquire its suppliers, distributors, partners, and/or other organizations that can help solidify its entire value chain.

Definition and Examples of Horizontal Integration

On the other hand, horizontal integration involves an organization merging with another organization or acquiring an existing one that operates within the same sector industry, as well the same market or segment.

The merger of American-based chip supplier Applied Materials Inc. and Japan-based chip supplier Tokyo Electron Ltd. in 2013 is an excellent example of a horizontal integration strategy. Take note that these two companies were the two largest chip suppliers in the world.

However, chip customers such as 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 such as 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 different direction of expansion. As their names imply, 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 expansion.

Nonetheless, to be more specific, vertical integration and horizontal integration are also market entry strategies. Through vertical expansion, an organization can effectively enter new markets by taking advantage of its vertical components—such as in the case of Google acquiring the Android mobile operating system. Meanwhile, 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. When Applied Materials and Tokyo Electron, the two became the largest chip suppliers in the world. With their combined market shares and technological capabilities, they have creates economies of scale needed to produce more effectively and efficiently.