Details about Vertical and horizontal integration

1. Marketing
Becoming Familiar with Vertical
and Horizontal Integration

2. Objectives
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Define horizontal integration
List and explain the advantages and
disadvantages of horizontal integration
Define vertical integration
Explain the three types of vertical
integration
List and explain the advantages and
disadvantages of Vertical integration

3. Define Horizontal Integration
• Horizontal Integration is the addition of other
business activities at the same level of the value
chain
• Examples:
– The Standard Oil Company buying 40 refineries
– An automobile manufacturer buying a sport utility
vehicle manufacturer
– A radio station that also owns a newspaper and
magazine

4. Advantages of Horizontal
Integration
• Economics of scale: Selling more of the
same product in different parts of the
world
• Economics of Scope: Sharing resources
common to different products. “Synergies”
• Increased Market Power
• Reduction in cost

5. Disadvantages of Horizontal
Integration
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Costs
Increased work load
Increased Responsibilities
Anti-trust issues
Creating a monopoly

6. Define Vertical Integration
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is the degree to which a firm owns its
upstream suppliers and its downstream
buyers.
Example:
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Carnegie Steel Company owned mills where
the steel was manufactured, mines where the
iron ore was extracted, coal mines that
supplied the coal, ships and railroads that
transported the material, etc.

7. Three Types of Vertical Integration
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Backward (upstream) vertical integration: this is when a
company owns some of the subsidiaries that produce
some of the inputs used in the production of its products.
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Forward vertical integration: this is when a company
owns the subsidiaries that market the product.
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Eample: When and automobile company owns a tire company
Example is an movie studio that also owns a chain of theaters
Balanced Vertical Integration: is a company that sets up
subsidiaries that supply them with inputs as well as
market their product.

8. Advantages of Vertical Integration
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Reduce transportation cost
Improve supply chain coordination
More oppertunities to differeniate by
means of increased control of inputs
Capture upstream and downstream profits
Increase entry barriers to potiental
competitors

9. Disadvantages of Vertical
Integration
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Capacity balancing: Making sure that
inputs will match ouputs at all levels
Potentially higher cost due to the lack of
supplier compition
Decreased Flexability
Developing new competencies may
comprimise existing competencies
Increase bureaucratic costs
Monopolization of markets

10. Quiz
 What is Horizontal Integration?
 What are two advantages of horizontal
integration?
 What are two disadvantages of horizontal
integration?

11. Quiz
 Define Vertical Integration
 What are the three types of vertical
integration and explain each.
 What are 2 advantages of vertical
integration?
 What are 2 disadvantages of vertical
integration?

12. THE END