what is the difference between vertical and horizontal integration?
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Vertical and horizontal integration are two strategies used by businesses to expand their operations and control various aspects of their supply chain or industry.
Vertical integration refers to the extent to which a company owns or controls its supply chain, from the production of raw materials to the distribution of finished products. In other words, it involves the integration of multiple stages of production or distribution under a single company.
To understand the difference between vertical and horizontal integration, it is helpful to consider an example. Let's take the example of a company that manufactures smartphones:
1. Vertical Integration: In the case of vertical integration, the smartphone manufacturer may choose to vertically integrate by acquiring or controlling various stages of the supply chain itself. This could involve owning or controlling the production of key components (such as the processors or display panels), as well as the distribution and retail networks to sell the smartphones directly to end consumers. By vertically integrating, the company can have full control over its supply chain, reduce costs, improve efficiency, and have a greater degree of control over the quality of the end product.
2. Horizontal Integration: On the other hand, horizontal integration involves the expansion or consolidation of a company's operations within the same stage of the supply chain or industry. In the case of the smartphone manufacturer, horizontal integration could involve acquiring or merging with other smartphone manufacturers or competitors to consolidate market share and increase economies of scale. This allows the company to expand its market presence, eliminate competition, and potentially gain more bargaining power with suppliers and retailers.
To summarize, vertical integration involves the integration of multiple stages of the supply chain under the same company, while horizontal integration involves expanding or consolidating within the same stage of the supply chain or industry.