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Horizontal and Vertical Integration

The document discusses vertical and horizontal integration. Vertical integration refers to a firm expanding activities upstream into suppliers or downstream into distribution. Forward integration means expanding downstream, while backward integration means expanding upstream. Horizontal integration refers to acquiring similar businesses at the same level of the value chain. Both vertical and horizontal integration can provide advantages like economies of scale, but also pitfalls like increased costs if efficiencies are lost.

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3K views

Horizontal and Vertical Integration

The document discusses vertical and horizontal integration. Vertical integration refers to a firm expanding activities upstream into suppliers or downstream into distribution. Forward integration means expanding downstream, while backward integration means expanding upstream. Horizontal integration refers to acquiring similar businesses at the same level of the value chain. Both vertical and horizontal integration can provide advantages like economies of scale, but also pitfalls like increased costs if efficiencies are lost.

Uploaded by

sujitbhadoriya
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 12

PRESENTATION

ON

“VERTICAL AND HORIZONTAL INTEGRATION”

PREPARED BY:

AFZAL ABBAS J
MAUNESH SHAH
NAKUL TRIVEDI
SALONI DANG
INTEGRATION ???

 Integration means combining parts so that they work together or


form a whole.

 Integration during product development is a process in which


separately produced components or subsystems are combined and
problems in their interactions are addressed.

 Integration is an activity by companies that specialize in bringing


different manufacturers' products together into a smoothly working
system.
11/04/21 IIPM 2
VERTICAL INTEGRATION ???

 The degree to which a firm owns its upstream suppliers and its
downstream buyers is referred to as vertical integration.

 Expansion of activities downstream is referred to as forward


integration.

 Expansion upstream is referred to as backward integration.

 Consider a firm whose products are made via an assembly process.


Such a firm may consider backward integrating into intermediate
manufacturing or forward integrating into distribution

11/04/21 IIPM 3
FORWARD INTEGRATION

 We can integrate our customers into the downstream supply chain.


For example PepsiCo did this when it began acquiring local bottlers.

 McDonald's practices the same with its extensive franchise network.

 Forward integration ensures a ready and willing outlet for our


products.

 Forward integration also allows us to link already existing control


over the production process with the way our customers sell our
products
11/04/21 IIPM 4
BACKWARD INTEGRATION

 We can integrate the inputs into our manufacturing operation as well --


essentially looking upstream in our value chain.

 Backward integration improves control over proprietary knowledge critical


to our final product.

 Backward integration enables us to produce our own components with


specific, unique features that distinguish our products from our
competitors'

 For example Hewlett-Packard does the same thing by manufacturing its


own specialized integrated circuits for use in their laser printers, shortening
response time to changing market conditions.
11/04/21 IIPM 5
Example of Backward and Forward Integration

BACKWARD INTEGRATION FORWARD INTEGRATION


RAW MATERIAL RAW MATERIAL

INTERMEDIARY MANUFACTURING INTERMEDIARY MANUFACTURING

ASSEMBLY
ASSEMBLY

DISTRIBUTION DISTRIBUTION

END CONSUMERS
END CONSUMERS

11/04/21 IIPM 6
ADVANTAGE OF VERTICAL INTEGRATION

 Reduce transportation costs if common ownership results in closer


geographic proximity.

 Improve supply chain coordination.

 Provide more opportunities to differentiate by means of increased control


over inputs.

 Capture upstream or downstream profit margins.

 Increase entry barriers to potential competitors. for example, if the firm can
gain sole access to a scarce resource.

 Gain access to downstream distribution channels that otherwise would be


inaccessible.
11/04/21 IIPM 7
PITFALLS OF VERTICAL INTEGRATION

 Capacity balancing issues. For example, the firm may need to build excess
upstream capacity to ensure that its downstream operations have sufficient
supply under all demand conditions.

 Potentially higher costs due to low efficiencies resulting from lack of


supplier competition.

 Decreased flexibility due to previous upstream or downstream investments.


(Note however, that flexibility to coordinate vertically-related activities
may increase.)

 Decreased ability to increase product variety if significant in-house


development is required.

 Developing new core competencies may compromise existing


competencies
11/04/21 IIPM 8
HORIZONTAL INTEGRATION ???

 Horizontal Integration is a potential strategic move which a firm may


consider.

 Horizontal Integration means to acquire business activities at the same level


of the value chain.

 Horizontal growth can be achieved by internal expansion or by external


expansion through mergers and acquisitions of firms offering similar
products and services.

Some examples of horizontal integration include:


 The Standard Oil Company's acquisition of 40 refineries.
 An automobile manufacturer's acquisition of a sport utility vehicle
manufacturer.
 A media company's ownership of radio, television, newspapers, books, and
magazines.
11/04/21 IIPM 9
ADVANTAGE OF HORIZONTAL INTEGRATION

 Economies of scale - achieved by selling more of the same product,


for example, by geographic expansion.

 Economies of scope - achieved by sharing resources common to


different products. Commonly referred to as "synergies.“(synergy
can be achieved by using the same brand name to promote multiple
products. )

 Increased market power (over suppliers and downstream channel


members)

 Reduction in the cost of international trade by operating factories in


foreign markets.
11/04/21 IIPM 10
PITFALLS OF HORIZONTAL INTEGRATION

 Firms that broadened their horizontal scope to achieve synergies that


did not exist.

 For example, computer hardware manufacturers who entered the


software business on the premise that there were synergies between
hardware and software. However, a connection between two
products does not necessarily imply realizable economies of scope.

 Synergies may be more imaginary than real. A famous example


was SAAB with its cars and aircraft.

11/04/21 IIPM 11
Thank a Million

11/04/21 IIPM 12

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