ment, etc. The integration strategy is divided into two categories; horizontal and vertical.
This paper will discuss the advantages that a company can gain through horizontal or
vertical integration.
Horizontal integration is the combination of two or more companies in the same
business, carrying out the same process or production, usually to reduce competition and
gain economies of scale. The main advantage involved with horizontal integration is
growth. Two or more organization group together to form a larger entity, which in turn,
gives them the ability to capture a larger market share. Market share is the proportion of
sales of a good or service that is controlled by a company. Most investors prefer a company
with a large market share because they are less likely to be squeezed by competitors.
Since companies are in the same line of business in horizontal integration, resources,
such as production, administration, marketing, etc. can be grouped together to meet
objectives. By combining resources of multiple companies, an organization can improve
its competitive position in the market. The new company will be able to meet customer
requirements much easier, they will be more efficient, and be able to achieve the flexibility
needed to become responsive to an ever changing marketplace.
With more resources at their disposal, a company is likely to experience higher customer
retention and increased sales. If the company is able to retain its old customers and gain new
ones through the merger, not only will their sales increase, but the larger customer base can
lead to greater regional coverage. If the new customers were previously outside the spectrum
of focus, the organization may have the opportunity to expand beyond its previous boundaries.
Vertical integration is the combination of two or more companies at different stages in
the same industry. There are two subgroups to vertical integration. The first is backward
integration, where a company obtains control over its suppliers. The second is forward
integration, where a company gains control over the distribution lines of their product.
Vertical integration lessens the risk of cost increases, protects product quality, and de-
creases competition by denying them inputs and customers. Vertical integration means
that an organization will be involved in self-manufacturing. This process removes power
from the supplier by bringing information in-house. It also eliminates negotiating costs
and the need for shopping. By lowering costs and ensuring stable supply, a company can
remove some of the risks in their businesses.
Integration (backward) into the supplier function, assures constant supply of input, and
protects against price increases. Backward integration allows for an organization to
produce its own components, which gives them control over knowledge critical to the
final product. This control avoids giving the supplier any information of a component
that may be used as bargaining power.
Integration (forward) into the distribution functions, assures proper disposal of outputs,
and captures additional profits beyond activity costs. Forward integration ensures a ready
and willing outlet for a product, and gives control over the production process with the
way customers sell a product.
Vertical integration, whether it’s backward, forward, or both, lessens the risks of cost
increases, and protects product quality for a company and their customers. It also
decreases competition by denying competitors inputs and customers.
In conclusion, the execution of a well thought out integration strategy can sustain
growth and increase profits. It is imperative however, that a company establishes an early
momentum by developing and pursuing a long term vision to realize future success.
Again, by increasing ownership of processes related to their product, a company can
raise its overall value.
