Horizontal and
Vertical Integration
Dr. B. Senthilkumar
Department of Mechanical Engineering
Overview of this Lecture
• Diversification
• Horizontal Integration
• Vertical Integration
HORIZONTAL INTEGRATION
• Merging with similar business – development of
monopoly
• Operate under one management
• Examples
• ArcelorMittal - Essar Steel (2019)
• Vodafone – idea (2018)
• Vodafone & Hutchison (2007)
• Arcelor-Mittal (2006)
• ACC & Damodar Cement (2005)
Strategy
• Access to skills, technology and resources
• Economies of scale (operational)
• Leads to the creation of Monopoly then the
Government will step in to control the market
• Enables expansion of the market and cut costs
• Ex.: Facebook – Instagram (whatsapp is in different
domain i.e mobile space)
• Disney-Pixar
• Exxon - Mobil
Features – Horizontal Integration
• Horizontal integration pays off as those involved can
widen their reach and eliminate weaker
competitors.
• Companies can gain institutional knowledge,
expertise, and strengths that they may lack from
another firm.
• Ultimately, integrating firms reduce their costs while
increasing revenues.
Opportunities
• Synergy
• Economies of Scale
• Cost Advantages
• Better research and Development
• Higher production and more control over
distribution
• Product expansion and diversification
• Better Marketing and Brand reputation
• Cross Selling
Challenges
• Firm suddenly becomes large – difficult to manage.
• Poor takeover exercise can leave employees
dissatisfied causing loss of key players / employees
• Changes in leadership and organization culture can
affect the integration
• High exposure to debts due to takeover exercise can
cause a downfall
• Government intervention or change in policies can
cause problems
Vertical integration
• Integrating with either supply side (backward) or
distribution side (forward)
• Improves cost, quality and control over inventory.
• Risky – rapid technological change
Horizontal
Vs
Vertical
Benefits of vertical integration
• No reliance suppliers and distributers
• ONGC – dependence on Tanker operators – demanding
higher charges – investment needed
• Economies of scale – opportunity to reduce cost and
increase profit and market share
Challenges
• Expensive – debt burden
• Management culture – does not support to cover
the operations from procurement to sales and
service
• Loss of focus – larger in size, people and resources
• Loss of flexibility – difficult to adopt rapid changes in
technologies
Examples of Vertical Integration
• Space X
• Apple
• Dmart
• Amazon basics – equivalent goods
Space X Strategy
• Raw materials costs of rocket were only three
percent of the sales price
• Lower its price per launch – United launch alliance -
$460 m against $90m
• Increase profit margins – reusable design
• Better knowledge of the product and its supply
chain
Apple strategy
• Custom processor – A series
• Display, touch screen etc.
• Globally distributed manufacturing and assembling
facilities – owned and third-party suppliers
• Sales – own stores along with third party distribution
DMart
• Own brands – promote verticals – procurement and
distribution
• 214 locations across India
• Own brands like Minimax, Premia, Homes, etc
