Irrespective of size or its nature every firm or organization needs growth and expansion and these can be done by the way of integration followed by firms or organizations. The main integrations followed by companies or vertical and horizontal integration.
Horizontal integration involves integration of two companies in same business line or same chain whereas vertical integration involves integration of various entities in distribution chain
If integration is done between companies who are in the same line of business or they have the same business activities is called horizontal integration. They may have the same complementary product, by product or other related.
It reduces competition in the market and increases their market share (sometimes creating a monopoly). This integration also helps in size expansion and economic scale is achieved.
By this integration companies can reach new customers and also they diversify.
In vertical integration companies who are in the same product but they are in different chain levels. It helps to gain control over the entire industry. Vertical integration is further classified into forward integration and backward integration.
If the company gains control over its distributors through integration is called forward integration. If the company gains control over its suppliers through integration is called backward integration.
The main objective is to minimize wastage and cost of products. Production distribution chain is also strengthened by this integration. Intermediaries are also eliminated.
The major differences between vertical integration and horizontal integration are as follows −
|Vertical integration||Horizontal integration|
|Focus on supply chain cycle.||Focuses on business.|
|One company integrates with another company, who are in different product lines.||One company integrates with another company, who are in the same product line.|
|Cost and wastage is reduced.||Increase in market share.|
|Less capital is required.||Capital requirement is high.|
|Industry control.||Market control.|
|Increased dominance.||Cost control through operational efficiency.|
|Forward integration, backward integration and balance integration are the types of vertical integration.||There are no types of horizontal integration.|