Vertical vs. Horizontal Integration

Through class discussions, I have come to realize that many people in our class are confused about the distinction between vertical and horizontal integration, and they often have difficulty discerning which of these business models is adhered to by certain companies. As such, I am setting out to clarify the difference between the two models as well as give present-day examples of such models to increase the ease of understanding.



In vertical integration, companies gain control of the entire supply chain of their product. There are two ways to do so: forward integration involves a company taking control of the post-production process (such as a car manufacturing company buying a dealership), while backwards integration involves a company controlling the resources for its product. This is illustrated in the above diagram, where both kinds of vertical integration are shown; the meat company controls everything in the process from delivery wagons to the cattle themselves. The benefits of vertical integration are that it allows a company to strengthen its supply chain and reduce the costs of going to other companies to acquire products, as well as decreasing the uncertainty of the process. However, it also costs more to coordinate and may lead to monopolization of markets. One of the most famous examples of this in our history is Carnegie Steel, which controlled everything from coal and ore mines to the ships and railroads that transported products and resources. In the present day, Apple is a huge example of vertical integration; it controls processor and hardware designs as well as the sales of its product.

Horizontal integration similarly allows a company to grow, though this time by acquiring another company in the same industry. Modern day examples of this model are the acquisition of Pixar by Disney and the acquisition of Instagram by Facebook. In both of these instances, a large company is buying another company in the same industry in order to increase size, diversify the product, and reduce competition. Horizontal integration also allows companies to expand into new territories by acquiring an already existing company, rather than building an entirely new one from scratch. The drawback to this is a potentially lower reputation due to actions being perceived as greedy and aggressive. Again, as illustrated by the diagram, the oil company gains power and reach by acquiring smaller, independent oil refineries that cannot possibly compete.

Both of these methods of business modeling lead to increased influence. The main difference between the models is the contrast between the expansion of the current business in vertical integration and the acquisition of other businesses in horizontal integration.