Horizontal & Vertical Integration

Chose an industry and give an explanation of what vertical and horizontal integration is within an industry

Give at least 2 or more advantages and disadvantages of its structure

Vertical Integration:

Definition - Vertical integration is a strategy where a company expands its business operations into different steps on the same production path, such as when a manufacturer owns its supplier and/or distributor.

Example - A classic example of vertical integration in the film industry can be found in the Hollywood Studios in the 1920s and 30s. During this time, the studio owned almost all parts of the value chain. They owned the actors and directors, the production studios, the distribution network and the cinema chains.

Advantages DisadvantagesIt allows you to invest in assets that are highly specialized - Vertical integration can give you a great advantage over your competitors, allowing you to invest and develop the products that you are currently offering.

It can have capacity-balancing problems - A good example of this situation is when a business needs to establish excess upstream capacity to ensure its downstream operations will get sufficient supply under any demand condition.

It gives you more control over your business - One great benefit that is sought by companies that are getting into vertical integration is more control over the value chain.

It can bring about more difficulties - Take note that vertical mergers will have less economies of scale, as most of their production processes are at different levels.

It allows for positive differentiation - This business strategy can give an organization important access to

It can result in decreased flexibility - The main contributors to this problem are the upstream and

more production inputs, process and retail channels, and distribution resources.

downstream investments the business is making.

It requires lower costs of transaction - This can be realized through inter transactions that can be made between subsidiaries that typically have a central communication and management system that is inexpensive to employ.

It can create some barriers to market entry - Manufacturing businesses that have control over access to crucial raw materials and components that are quite scarce due to vertical integration would often create some barriers to market entry.

Horizontal Integration:

Definition - Horizontal Integration is where an organisation develops by buying up competitors in the same section of the market e.g. one music publisher buys out other smaller music publishers.

Example - A diagram illustrating horizontal integration and contrasting it with vertical integration. Horizontal integration is the process of a company increasing production of goods or services at the same part of the supply chain. A company may do this via internal expansion, acquisition or merger.

Advantages DisadvantagesEconomics of Scale – Selling more of the same product in different parts of the world.

Costs

Economics of Scope – Sharing resources common to different products.

Increased Work Load

Increased Market Power Increased ResponsibilitiesReduction in Costs Creating a Monopoly