Business

Difference Between Horizontal Integration and Vertical Integration

Main difference

Firms and companies try to gain more control of the market than their competitors in order to become number one in the specific field and make more and more profits. The strong competition in the market is mainly eliminated by improving the quality, reducing the prices and making the best possible promotions of your product. The other possible plan to gain control of the market and eliminate strong competition is to acquire or merge with the companies. We come across both terms in the business field; Horizontal integration and vertical integration, both terms explain the nature and type of growth and expansion of companies using mergers or acquisitions. When a company acquires or establishes a merger with the other company or companies, working in the same part of the supply chain/production level, this type of expansion is known as horizontal integration. On the other hand, when a company acquires or establishes a merger with another company or companies, working in the different stages of production, this type of expansion is known as vertical integration.

Comparison chart

horizontal integration Vertical integration
Definition Horizontal integration is the type of expansion in which a company acquires or merges with another company or companies, working at a similar level of production. Vertical integration is the type of expansion in which a company acquires or merges with another company or companies, working at different levels of production.
Purpose The sole purpose of horizontal integration is to grow the business by eradicating competition and maintaining maximum market share. The sole purpose of vertical integration is to reduce cost by setting up the supply chain network.
Useful Horizontal integration is useful when you want to take control of the market. Vertical integration is useful when you want to take control of the industry (different levels of production).
What is horizontal integration?

Horizontal integration is the type of growth and expansion of the firm or company. In this type of expansion, a company acquires or merges with another company or companies, working at the same level of production. This type of policy is adopted by the company to eradicate competition in the market and maintain maximum market share; it also leads to the growth of the business size of the company. Whenever a company intends to acquire or establish the merger with the company, it needs considerable capital to attract the other company, which also has the greater or lesser percentage of the market. In this, both companies going through merger and acquisition produce similar products or offer fairly similar services. As we know, PEPSI and COCA-COLA are two of the companies that produce similar types of soft drinks in the market. They are also the strong competitor in the market, holding the most of the soft drink market share worldwide. For example, if both companies go through a merger or one acquires the other, this type of expansion to the same level of production with similar products is known as horizontal integration.

What is vertical integration?

Vertical Integration is the type of growth and expansion of the firm or company. In this type of expansion, a company or firm acquires or establishes a merger with another company or companies, working in the different stages of production for a fairly similar product. The main objective of a company that is committed to vertical integration is to strengthen the supply chain of that product by reducing the cost of production. As we know, there are different levels of production, that is, production of products, distribution and supplier of that product. The company wants to expand in such a way that they could gain control of the entire industry, they decided to merge or acquire the other company that works at different levels of production. For example, PEPSI is known for the production of products; if they manage to acquire or establish a merger with a company that works at different levels of production, it means that it works as a distributor or supplier of that product; surely it would have reduced the total cost of that product.

Horizontal integration versus vertical integration
  • Horizontal integration is the type of expansion in which a company acquires or merges with another company or companies, working at a similar level of production. On the other hand, vertical integration is the type of expansion in which a company acquires or merges with another company or companies, working at different levels of production.
  • The sole purpose of horizontal integration is to grow the business by eradicating competition and maintaining maximum market share. Contrary to this, the sole purpose of vertical integration is to reduce the cost by establishing the supply chain network.
  • Horizontal integration is useful when you want to take control of the market, while vertical integration is useful when you want to take control of the industry (different levels of production).

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