Friday, 9 March 2012

Vertical Integration Vs. Horizontal Integration

Vertical Integration:
When a company expands its business into areas that are at different points of the same production path.
>>A car company that expands into tire manufacturing would be an example of vertical integration. A company such as this is often referred to as vertically integrated.

Backward Integration:
A form of vertical integration that involves the purchase of suppliers in order to reduce dependency.
>>A good example would be if a bakery business bought a wheat farm in order to reduce the risk associated with the dependency on flour.

Forward Integration:
A business strategy that involves a form of vertical integration whereby activities are expanded to include control of the direct distribution of its products.

>> A good example of forward integration is when a farmer sells his/her crops at the local market rather than to a distribution center.
Horizontal Integration :
The acquisition of additional business activities that are at the same level of the value chain in similar or different industries. This can be achieved by internal or external expansion. Because the different firms are involved in the same stage of production, horizontal integration allows them to share resources at that level. 

If the products offered by the companies are the same or similar, it is a merger of competitors. If all of the producers of a particular good or service in a given market were to merge, it would result in the creation of a monopoly. Also called lateral integration.

>>Examples of horizontal integration include an oil company's acquisition of additional oil refineries, or an automobile manufacturer's acquisition of a light truck manufacturer.

Horizontal integration offers several advantages, including favorable economies of scale, economies or scope, increased market power and reduction in the costs associated with international trade by operating in foreign markets. Horizontal integration is in contrast to vertical integration, where firms expand into different activities, known as upstream or downstream activities.

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