You may have heard of the terms Horizontal Integration and Vertical Integration but may not know what they mean. Even if you understand the concepts, it can be hard to see how they apply to your business.
We’re here to help! This post will explain horizontal and vertical system integration, give some examples, and show you how Industry 4.0 is changing the game.
What are Horizontal and Vertical System Integration?
What is Horizontal Integration?
Horizontal integration is a business strategy companies use to increase their market share. It involves the acquisition of other companies that produce similar products or services. By doing this, the company can combine resources and create a larger, more competitive entity.
- The merger of two competing banks
- The acquisition of a company by a more significant retailer
- A joint venture between two companies to develop a new product
- A company that manufactures tires may acquire or merge with its competitive company.
The goals of horizontal integration are as follows:
- To achieve efficiencies through economies of scale
- To create a more competitive market
- To produce and distribute products and services at a lower cost
- To increase market share and profitability
- To innovate and improve customer service
What is Vertical Integration?
Vertical integration is a business strategy that companies use to gain control over the entire production process. It refers to the integration of different levels of a company or organization.
This can be done by integrating other parts of the supply chain or connecting different levels of the organization (such as R&D, manufacturing, and sales).
Vertical integration allows companies to achieve economies of scale and improve their bargaining power with suppliers and customers.
- The merger of a distributor and a retailer
- A joint venture between a car manufacturer and an auto parts supplier to develop a new car model
We can classify vertical integration into two types, forward integration, and backward integration.
How do Horizontal and Vertical System Integration work together in Industry 4.0?
In a traditional manufacturing setting, businesses would generally operate independently from one another, with little to no communication or collaboration.
That often resulted in inefficiencies and duplications of effort, as each company would essentially reinvent the wheel.
Industry 4.0 changes this by creating a more interconnected system where businesses can share information and resources more efficiently.
That allows for a more coordinated approach to manufacturing, leading to greater efficiency and flexibility.
In Industry 4.0, horizontal and vertical integration work together to create a more efficient and interconnected system. Horizontal integration refers to integrating multiple businesses or organizations within the same industry.
In contrast, vertical integration refers to integrating different production stages within the same company. By combining these two processes, Industry 4.0 creates a more streamlined and efficient system that can better adapt to the market’s changing needs.
Pros and Cons of Horizontal Integration
When companies horizontally integrate, they are essentially buying out or merging with their competitors. That can lead to less market competition, which can benefit the business.
Increased market share
When a company takes over its competitors, it will likely increase its market share. That can give the company more power and influence over prices and make it easier to achieve economies of scale.
Economies of scale
When a company horizontally integrates, it can often achieve economies of scale. That means the company can produce goods and services more efficiently and at a lower cost than its competitors.
A company with a larger market share can often charge higher prices for its products and services. That can lead to increased revenue and profits.
Decreased production cost
In horizontal integration, two or more companies may join forces to share resources and decrease production costs. It can be advantageous for both companies involved.
Complications with coordination
When two companies merge, coordinating their activities cannot be easy. That can lead to inefficiencies and higher costs.
Integrating their employees and operations cannot be accessible when companies from different cultures merge. That can lead to tension and conflict within the company.
Loss of customer choice
When fewer companies are in a market, customers may have less choice. That can lead to higher prices and decreased customer satisfaction.
Pros and Cons of Vertical Integration
Greater control over the supply chain
When a company owns more of the companies in its supply chain, it has more control over the quality and cost of inputs. That can lead to a higher quality product for the consumer.
Decreased production costs
When a company vertically integrates, it can often control the entire production process from start to finish. That can lead to decreased production costs and increased efficiency.
A company that vertically integrates may be able to sell its product for a higher price. This is because the company has more control over the quality of the product and can charge a premium for a high-quality product.
Risk of over-investment
When a company vertically integrates, it often requires a significant up-front investment. This can lead to financial problems if the integration is not successful.
Loss of focus
A vertically integrated company may lose sight of its core competencies and become distracted from its main business goals.
Increased organizational and coordination costs
A vertically integrated company may have to manage a larger and more complex organization. This can lead to increased coordination costs and inefficiencies.
When is Horizontal Integration appropriate?
Horizontal integration is appropriate when a company wishes to expand its product offerings into new markets. By integrating with companies in other industries, a company can gain access to new customers and products. Horizontal integration can also help a company become more efficient and competitive by consolidating operations.
What are the steps involved in Horizontal Integration?
The steps involved in horizontal integration typically include
1. Assessing the potential for horizontal integration
2. Deciding which companies to merge with or acquire
3. Negotiating the terms of the merger or acquisition
4. Completing the transaction
5. Integrating the businesses
What are the different types of Vertical Integration?
There are two main types of vertical integration:
1. Backward vertical integration, where a company controls its suppliers
2. Forward vertical integration, where a company handles its distributors or retailers
As we move into the fourth industrial revolution, or Industry 4.0, horizontal and vertical system integration will be essential for businesses to remain competitive. However, each type of integration has its advantages and disadvantages, so it is crucial to consider which one is right for your company.
Vertical integration can give you greater control over your supply chain and production process, but it also requires a significant up-front investment.
On the other hand, horizontal integration can lead to increased market share and economies of scale, but it can also complicate coordination between different parts of the company.
Ultimately, deciding which type of integration to pursue will depend on your company’s specific goals and needs.