Horizontal Integration vs. Vertical Integration: Definitions

Horizontal integration is an integration strategy in which a company acquires one or more companies at the same level of the supply chain within its industry. Companies can achieve horizontal integration through a merger, acquisition of another company, or internal expansion. The goal of horizontal integration is to earn more revenue by increasing production and reducing production costs to achieve cost advantages or economies of scale.

While horizontal integration always involves combining multiple companies with similar functions, this can happen in several ways. The three types of horizontal integration are:

1. 1. Horizontal acquisition: Horizontal acquisition involves one (usually larger) company purchasing another (generally smaller) company in the same industry. Some examples of horizontal acquisition include The Walt Disney Company’s acquisition of Marvel Entertainment, LLC, in 2009 under CEO Bob Iger; Starbucks’s purchase of Seattle’s Best Coffee under chairman Howard Shultz in 2003; and makeup artist Bobbi Brown’s sale of her cosmetics company to Estée Lauder in 1995.
2. 2. Horizontal merger: Unlike a more prominent company purchasing a smaller one, as is often the case with an acquisition, mergers involve two similar companies joining forces. The luxury-goods conglomerate LVMH resulted from two mergers: In 1971, Champagne house Moët & Chandon merged with cognac producer Hennessy. In 1987, fashion house Louis Vuitton joined the business to create LVMH, which later acquired many independent luxury brands, including Marc Jacobs. Companies like LVMH commonly use a combination of mergers, internal expansion, and acquisitions as they expand.
3. 3. Internal expansion: A company can expand internally rather than purchasing or merging with an existing company. For example, Wolfgang Puck Companies expanded internally from restaurants into catering. Condé Nast is a publishing company that began with Vogue magazine in 1909. Over the years the company has both acquired existing publications and expanded internally with titles like Teen Vogue, famously helmed by Elaine Welteroth. Horizontal integration allows Condé Nast publications to share resources and personnel. For example, Vogue editor-in-chief Anna Wintour is also the art director and Global Chief Content Officer of the entire publication house.

This table illustrates how companies can practice horizontal integration through acquisition, mergers, internal expansion, or a combination of strategies.

Vertical integration is a competitive strategy companies use to secure total control over production and distribution channels. A company that buys its own supply of raw materials for a product along with the tools to make and transport that product employs vertical integration. This strategy aims to own as many parts of the supply chain as possible and minimize transaction costs typically spent on outsourcing. Netflix is a good example of vertical integration in the internet age. In 2013, the streaming service (formerly a DVD rental company) began releasing original content, most notably The Duffer Brothers’ Stranger Things (2016). By vertically integrating, Netflix reduced its reliance on other content providers.

Vertical and horizontal integration are business models designed to help companies increase profitability, but they achieve this differently.

• Challenges: A horizontally integrated company has to stitch together similar companies, maintaining cohesion as the company expands. Vertically integrated companies must stitch together several different working parts of the supply chain, ensuring each disparate part works as efficiently as the next.
• Competitive strategy: When a vertically integrated company owns all or several parts of the supply chain, they become independent from suppliers. This allows the company to increase efficiencies, lower costs, and compete with other companies by offering cheaper products. Horizontal integration involves buying competitor companies within the same industry that are similar in size. Buying out the competition not only creates a larger company or conglomerate, but creates economies of scale, increases market power among suppliers and distributors, and opens up new markets for the company.
• Resources purchased: Horizontal integration involves one company buying another company within the same industry, while vertical integration involves buying a range of companies up and down the supply chain.

A successful horizontal integration can provide numerous benefits, including:

1. 1. Economies of scale and scope: With horizontal integration, the merged businesses tend to benefit from economies of scale and scope. Economy of scope indicates that simultaneously producing two related goods is more cost-effective than making each good on its own. Economy of scale indicates that increasing production output leads to proportionate cost savings.
2. 2. Competitive advantage: Horizontal integration removes competitors and gives the new business a more substantial advantage in its specific market. Learn more about competitive advantage.
3. 3. New markets: When a merger involves two companies in different markets, the new company gains access to a new market. For example, if an American restaurant chain acquired a similar European restaurant chain, it would now operate in a new foreign market without having to build up operations there from scratch.
4. 4. Positive synergies: In the context of mergers and acquisitions, the concept of synergy means that the two merged companies have a greater value together than apart. When two companies horizontally integrate, they may benefit from cost synergies related to production, distribution, marketing, and more.
5. 5. Product differentiation: The new business may provide the company a larger line of products with different features, giving customers additional options from which to choose. Learn more about product differentiation.

There are potential risks involved in horizontal integration. These include:

1. 1. Cultural incompatibilities: Different companies may have different corporate cultures. When two companies merge, it's not uncommon for the newly formed company to experience growing pains due to various management styles and approaches to running day-to-day operations.
2. 2. Negative synergies: Sometimes synergy can backfire and harm the business. For example, the newly merged company may not be adequately prepared to handle its larger size and might struggle to manage the additional workload.
3. 3. Monopolies and oligopolies: A decrease in competition within an industry leads to market share consolidation. When a small group of companies dominates a market share, those companies make up an oligopoly, and when it's only one company, it is considered a monopoly. While a dominant market share benefits the dominant company, monopoly pricing disadvantages consumers. It may trigger an investigation from the Federal Trade Commission to ensure the company isn’t violating antitrust laws.

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