VERTICAL & HORIZONTAL SUPPLY CHAIN

 

Horizontal and vertical integrations are strategies used by businesses in the same industry or production process. In horizontal integration, a company takes over another that operates at the same level of the value chain in an industry. A vertical integration, on the other hand, involves the acquisition of business operations within the same production vertical. When a company wishes to grow through horizontal integration, its aim is to acquire a similar company in the same industry. Companies may choose to undergo horizontal integration in order to increase their size, diversify product or service offerings, achieve economies of scale, or reduce competition. They may also wish to gain access to new customers or markets, including overseas. For example, a department store may choose to merge with a similar one in another country to start operations overseas. The result of horizontal integration, when successful, is the ability to produce more revenue together compared to if they were to compete independently. In addition to this, a newly merged company can cut down on costs by sharing technology, marketing, research and development (R&D), production, and distribution. 

Vertical Integration: 

A company that undergoes vertical integration acquires a company that operates in the production process of the same industry. Some of the reasons why companies choose to integrate vertically include strengthening their supply chain, reducing production costs, capturing upstream or downstream profits, or accessing new distribution channels. To do this, one company acquires another that is either before or after it in the supply chain process. This strategy is important for many companies for several reasons. Not only does it increase profits from the newly acquired operations by selling its products directly to consumers, but it also guarantees efficiencies in the production process, and cuts down on delays in delivery and transportation. 

Horizontal Integration 

Companies can integrate vertically in two ways: backward or forward. Backward integration occurs when a company decides to buy another company that makes an input product for the acquiring company's product. For example, a car manufacturer is undergoing a backward integration if it acquires a tire manufacturer. This ensures the manufacturer has a steady supply of tires in order to keep making its cars. Forward integration occurs when a company decides to take control of the post-production process. So that car manufacturer from the example above may acquire an automotive dealership through forwarding integration—the process of acquiring a business ahead of its own supply chain. This not only gets the manufacturer closer to the consumer, but it also gives the company more revenue.

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