There are two way for companies to grow. They can grow horizontally by purchasing another company in their industry or the can grow vertically and buy companies that are up or down their supply chain.
Vertical integration can bring you closer to the customer if you also have a hand in the distribution of your product. In the vertical integration business expansion model, companies expand by gaining control of their entire supply chain. The benefit of this type of expansion is to gain more control over cost, quality and delivery times.
Apple for years has championed a vertical model, including opening their own retail outlets. Other businesses that have proved that vertical Integration works are Google, who acquired mobile-device maker Motorola Mobility so that they have control of the supply chain in term of smart phones that run their Android operating systems.
Benefits and Drawbacks of Vertical Integration
Ideally, vertical integration is when a company benefits by having control of the entire manufacturing process – from creation of the raw materials to the end consumer. This should translate into better cost control and quality control, because the company can set its own prices for raw goods required in the manufacturing processes. The company also benefits from being able to control the costs related to the manufacturing and distribution. The possible drawback to this control is a loss of flexibility and resilience. In some cases this results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety.
Horizontal integration occurs if one company acquires or merges with other companies that do the same thing. This is usually the case in a fixed market with little room for growth, because the players in the marketplace have established, loyal customer bases. For example, a particular community may only be able to support three shoe stores. The owner of one of those shoe stores wants to grow his business, so he may choose to merge or acquire one or both of his competitors.
Benefits and Drawbacks of Horizontal Integration
Horizontal integration allows a company to grow without having to start our as “the new kid on the block.” This gives a company a bit of a leg up in terms of profitability from the beginning, but also in terms of overall business costs such as the ability to have shared offices. Unfortunately, there is only so much a business can do when the costs outweigh the benefits – because profits and resources have come out of it in order to finance the acquisition.
While either Horizontal or Vertical Integration can work for many businesses, it may not work in the industry that you are involved in. Keep in mind that the best way to expand your business is one that helps you become more profitable and more flexible in the future. But at the end of the day, you must consider all the risks as well as all the potential rewards.