Vertical vs horizontal integration: Key differences and examples

Despite ongoing economic and geopolitical uncertainty, 58% of business leaders focus on building new ventures.  Deal-makers also expect a rise in mergers and acquisitions (M&A). As Morgan Stanley’s Co-Global Head of M&A, Tom Miles puts it:

When it comes to growth, how should businesses expand? Should they acquire similar companies or strengthen their supply chain?

This article highlights the key differences between horizontal and vertical integration, their impact on business and M&A strategies, and when to use each approach.

Highlights:

• Vertical integration occurs when companies at different stages of the supply chain merge or one company acquires another.
• Horizontal integration takes place when a company acquires or merges with another at the same supply chain level or the same industry. Such companies are often rivals.
• Vertical integration allows better supply chain management, production volume handling, more quality control, and competitive advantage.
• Horizontal integration boosts market power, achieves economies of scale, reduces competition, enhances brand recognition, and expands the customer base. 

What is vertical integration?

Vertical integration is a strategy for expanding control over various supply chain stages. This can involve acquiring suppliers or distributors/retailers. The goal is to cut costs, boost efficiency, and gain more control over production and distribution. 

In short, vertical integration happens when two or more companies at different levels of the same supply chain process merge (or one company acquires another). 

There are two main types of vertical integration strategy:

• Forward integration
  This involves acquiring or merging with a distributor or retailer to control product delivery. For instance, when a clothing brand opens its own retail store.
• Backward integration
  This is acquiring or merging with a supplier to secure raw materials and production processes. For instance, when a car manufacturer buys a tire factory.

Pros

• More control over the supply chain
  Owning suppliers or distributors reduces reliance on third parties, reducing delays, shortages, and unexpected costs.
• Better quality control
  Controlling production allows companies to enforce high standards, leading to better products, fewer defects, and a stronger brand reputation.
• Cost savings
  Cutting out third parties can lower costs for raw materials, production, or the distribution process, allowing competitive pricing and higher profits.
• Competitive advantage
  Companies managing their own supply chains can respond faster to market changes and customer needs, outpacing competitors who depend on external suppliers.
• More control over production volume
  Companies can adjust output based on demand rather than relying on third-party manufacturers, preventing overproduction and reducing storage costs, ensuring products are always available when needed.

Cons

• Operational complexity
  Managing different parts of the supply chain requires more resources and expertise, making the business harder to run.
• Less flexibility
  Relying solely on internal suppliers limits options if demand drops or costs rise, and the company may struggle to adapt.
• Lack of expertise
  Expanding into new areas, like manufacturing or retail, requires specialized knowledge. Without the right skills, operations may become inefficient and unprofitable.
• Poor cultural fit
  Differences in company culture and management style can create conflicts during mergers, causing employee dissatisfaction, reduced productivity, and even key talent loss.

Real-life examples

Here are a couple of real vertical integration cases:

• IKEA’s acquisition of the Baltic and Romanian forests
  In 2015, IKEA made a move to acquire large areas of forests in the Baltics and Romania to secure its own wood supply. This backward vertical integration helped IKEA to gain more control over raw materials, making its supply chain more stable and efficient.
• Walmart’s acquisition of JoyRun
  In 2020, Walmart acquired JoyRun, a delivery startup that connects local couriers with customers for quick deliveries. The deal is part of Walmart’s strategy to improve its delivery options, especially for groceries, by incorporating JoyRun’s assets into its own delivery network. This is an example of forward vertical integration, as Walmart is expanding its control over distribution channels, specifically focusing on the final stage of delivery to customers.

What is horizontal integration?

Horizontal integration occurs when a business expands by acquiring, merging with, or forming partnerships with competitors at the same stage of the value chain. The main goal is to increase market share, reduce competition, and achieve economies of scale. 

Companies involved in horizontal integration typically sell similar products or services and have a similar customer base. 

Regulators closely monitor these integrations to ensure fair competition and prevent monopolies. 

Pros

• Increased market power
  Merging creates a larger business with more control over pricing and supply, making it harder for smaller competitors.
• Economies of scale
  A bigger company can lower production costs by sharing resources like factories, warehouses, or marketing, improving profit margins.
• Greater brand recognition
  Merging with a well-known brand can boost reputation and customer trust, leading to increased sales.
• Reduced competition
  Acquiring a rival eliminates competition, allowing the company to set prices more freely.
• Expanded customer base
  Merging gives access to each other’s customers. This allows them to sell more products and enter new markets more easily.

Cons

• Post-merger integration challenges
  Merging is complex. Differences in culture, management, and technology can create inefficiencies and conflicts.
• Regulatory scrutiny
  Governments monitor large integrations to prevent monopolies. They may block or impose restrictions if mergers reduce competition too much.
• Loss of talent through layoffs
  To cut costs, merged companies often lay off employees with overlapping roles. This can lead to the loss of experienced workers and lower employee morale.
• Decreased market diversity
  When big companies buy out smaller competitors, consumers have fewer choices. This can lead to higher prices and less innovation in the long run.

Real-life examples

Here are examples of horizontal integration:

• Meta’s acquisition of Instagram
  In 2012, Meta (then, Facebook) acquired Instagram. At the time, Instagram was a rapidly growing photo-sharing platform with over 30 million users, which made Meta buy it to eliminate competition. Being one of the most successful of Meta’s acquisitions, the deal, however, resulted in a current antitrust trial over Meta’s attempt to maintain a monopoly over social media.

• JetBlue Airways Corporation’s acquisition of Spirit Airlines
  In 2022, JetBlue Airways announced its plan to acquire Spirit Airlines. The goal was to create a stronger competitor to major U.S. airlines like Delta and American Airlines by expanding JetBlue’s market share and fleet size. However, the deal faced regulatory scrutiny over concerns about reduced competition in the airline industry and was eventually terminated​. 

Key differences between vertical and horizontal integration

Let’s examine the main differences between vertical and horizontal integrations.

Nature

• Vertical integration
  A company expands by controlling different supply chain stages, such as suppliers, manufacturers, or distributors.
• Horizontal integration
  A company grows by merging with or acquiring competitors in the same industry to increase market share.

Purpose

• Vertical integration
  Aims to improve efficiency, reduce costs, and secure a stable supply chain.
• Horizontal integration
  Focuses on reducing competition, increasing market share, and gaining a larger customer base.

Control over the supply chain

• Vertical integration
  Provides full control over production, distribution, and raw materials, reducing dependency on external suppliers.
• Horizontal integration
  Does not directly affect the supply chain but strengthens market control by acquiring competitors and consolidating business operations.

Cost efficiency

• Vertical integration
  Eliminating middlemen delivers cost savings but requires high initial investment.
• Horizontal integration
  Economies of scale lower costs, producing goods more efficiently.

Market power

• Vertical integration
  Secures resources and distribution channels but does not always lead to a higher market share.
• Horizontal integration
  Increases market dominance by eliminating competitors, improving pricing, and industry leadership.

Risk exposure

• Vertical integration
  High operational risks due to managing multiple business segments and larger capital investment.
• Horizontal integration
  Faces regulatory risks, as authorities may block integrations that reduce competition too much.

When to use vertical vs horizontal integration?

When deciding between vertical or horizontal integration, choose based on the market environment, financial situation, and the business’s long-term objectives.

Opt for vertical integration if:

• You face supply chain disruptions or rely too heavily on suppliers.
• You have the resources for a high upfront investment.
• You want better cost control, quality assurance, and production stability.

Choose horizontal integration when:

• Your industry is highly competitive, and market share is key.
• You want to grow while minimizing operational risks.
• Your goal is to eliminate competition and expand your customer base. 

Summing up

Vertical and horizontal integration each offer unique benefits for business growth. Vertical integration helps companies control their supply chain and reduce costs, while horizontal integration focuses on increasing market share and cutting competition.

When choosing the right strategy for your business, think of whether you need better control over production or want to expand quickly in a competitive market.

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