Companies may achieve vertical integration through internal expansion, an acquisition, or a merger. This strategy is important for many companies for several reasons. Not only does it increase profits from the newly acquired operations by selling its products directly to consumers, it also guarantees efficiencies in the production process, and cuts down on delays in delivery and transportation.
Companies can integrate vertically in two ways: backward or forward. Backward integration occurs when a company decides to buy another company that makes an input product for the acquiring company's product. For example, a car manufacturer is undergoing a backward integration if it acquires a tire manufacturer.
This ensures the manufacturer it has a steady supply of tires in order to keep making its cars. Forward integration occurs when a company decides to take control of the post-production process. So that car manufacturer from the example above may acquire an automotive dealership through forward integration—the process of acquiring a business ahead of its own supply chain. This not only gets the manufacturer closer to the consumer, but it also gives the company more revenue.
Some examples of vertical integration include:. A-B InBev. Accessed Feb. The Walt Disney Company. Ikea Group. Corporate Finance. Business Essentials. Your Money. Personal Finance. Your Practice. Popular Courses. Horizontal vs. Vertical Integration: An Overview Horizontal and vertical integrations are strategies used by businesses in the same industry or production process. Vertical integration involves the acquisition of business operations within the same production vertical.
Horizontal integrations help companies expand in size, diversify product offerings, reduce competition, and expand into new markets. Vertical integrations can help boost profit and allow companies more immediate access to consumers. Article Sources. Investopedia requires writers to use primary sources to support their work.
These include white papers, government data, original reporting, and interviews with industry experts. A horizontal acquisition concerns itself with the latter, while vertical acquisitions with the former. With a vertical acquisition, you will have more control over the entire production and distribution process. It will enable you to increase profit by eliminating intermediaries. Additionally, it will allow you to create custom components that are specialized for your products.
And in time, you will be able to enjoy lower production costs, utilize resources better, and avoid wastage. However, be wary that having full control over the production and distribution process can be very expensive and time-consuming. Ask yourself this: Are you financially, organizationally, and operationally ready to undertake such a huge responsibility?
It takes a lot of time and hard work to set up a smooth production and manufacturing process. So it's better to be safe than sorry. In contrast, a horizontal acquisition is great for synergy but not so much for self-sufficiency. This is because you rely on outside vendors for production and manufacturing.
Access to multiple vendors means less risks and acts as a safety net if something goes wrong with one vendor or another. Essentially, it comes down to whether you want to have full control over all the processes that lead to creating and distributing your product.
Or whether you would rather delegate this process to an outside vendor and focus on your final product. A horizontal acquisition brings synergy but not self-sufficiency, while a vertical acquisition promises greater self-sufficiency. Do I want to have more control over the production and manufacturing process - or greater synergy? Another major difference between a horizontal and vertical acquisition is the level of diversification and concentration.
A horizontal acquisition lets you diversify your business by extending your product range, namely by combining your existing inventory of products and services with those of a competitor. This way you are able to increase the diversity of your products, tap into news market sectors, and expand into wider geographical markets.
In contrast, a vertical acquisition is much more appropriate if you wish to concentrate on refining your current product range. By acquiring a company that is at a different stage on the same production path you can exercise control over an industry, not just a market. Do I want to diversify my product range - or concentrate on tweaking existing product range? The advantages and disadvantages between a horizontal and vertical acquisition also differentiate the two strategies. Nevertheless, although vertical acquisition does have its perks, it's not without fault.
Some disadvantages of vertical acquisition include:. Compare the advantages and disadvantages of a horizontal and vertical acquisition before choosing between the two. A business acquisition is the process of acquiring another company and its assets. The main reason companies decide to go through with an acquisition is to tap into existing strengths and overcome weaknesses.
Distinguish between a horizontal and vertical acquisition and decide which type of acquisition suits your needs best. Learn about us. What services do you need? Vertical Acquisition: Know the Difference 09 January.
Horizontal vs. Vertical Acquisition: The Objectives The first difference that set both types of business acquisitions apart is objective. Before choosing between a horizontal and vertical acquisition ask yourself this: Do I want to increase the size of my business - or do I want to strengthen the supply chain? Vertical Acquisition: Self-Sufficiency Another major difference between a horizontal and vertical acquisition is the level of self-sufficiency. Before choosing between a horizontal and vertical acquisition ask yourself this: Do I want to have more control over the production and manufacturing process - or greater synergy?
Vertical Acquisition: Diversification Another major difference between a horizontal and vertical acquisition is the level of diversification and concentration. Before choosing between a horizontal and vertical acquisition ask yourself this: Do I want to diversify my product range - or concentrate on tweaking existing product range?
Vertical Acquisition: Advantages and Disadvantages The advantages and disadvantages between a horizontal and vertical acquisition also differentiate the two strategies. Some key advantages of a horizontal acquisition include: Eliminates direct competitors.
Focuses on improving product. Gives the benefit of economies of scale.
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