MarketingMarketing

Becoming Familiar with Vertical Becoming Familiar with Vertical and Horizontal Integrationand Horizontal Integration

Objectives 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

Define Horizontal IntegrationDefine 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

Advantages of Horizontal Advantages of Horizontal IntegrationIntegration

• 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

Disadvantages of Horizontal Disadvantages of Horizontal IntegrationIntegration

• Costs

• Increased work load

• Increased Responsibilities

• Anti-trust issues

• Creating a monopoly

Define Vertical IntegrationDefine Vertical Integration

is the degree to which a firm owns its is the degree to which a firm owns its upstream suppliers and its upstream suppliers and its downstream buyers. downstream buyers.

Example:Example: Carnegie Steel Company owned mills Carnegie Steel Company owned mills

where the steel was manufactured, mines where the steel was manufactured, mines where the iron ore was extracted, coal where the iron ore was extracted, coal mines that supplied the coal, ships and mines that supplied the coal, ships and railroads that transported the material, railroads that transported the material, etc. etc.

Three Types of Vertical IntegrationThree Types of Vertical Integration

Backward (upstream) vertical integration: this is Backward (upstream) vertical integration: this is when a company owns some of the subsidiaries that when a company owns some of the subsidiaries that produce some of the inputs used in the production of produce some of the inputs used in the production of its products.its products. Eample: When and automobile company owns a tire Eample: When and automobile company owns a tire

companycompany

Forward vertical integration: this is when a company Forward vertical integration: this is when a company owns the subsidiaries that market the product. owns the subsidiaries that market the product. Example is an movie studio that also owns a chain of Example is an movie studio that also owns a chain of

theaters theaters

Balanced Vertical Integration: is a company that Balanced Vertical Integration: is a company that sets up subsidiaries that supply them with inputs as sets up subsidiaries that supply them with inputs as well as market their product.well as market their product.

Advantages of Vertical IntegrationAdvantages of Vertical Integration

Reduce transportation costReduce transportation cost Improve supply chain coordinationImprove supply chain coordination More oppertunities to differeniate by More oppertunities to differeniate by

means of increased control of inputsmeans of increased control of inputs Capture upstream and downstream Capture upstream and downstream

profitsprofits Increase entry barriers to potiental Increase entry barriers to potiental

competitorscompetitors

Disadvantages of Vertical Disadvantages of Vertical IntegrationIntegration

Capacity balancing: Making sure that Capacity balancing: Making sure that inputs will match ouputs at all levelsinputs will match ouputs at all levels

Potentially higher cost due to the lack Potentially higher cost due to the lack of supplier compitionof supplier compition

Decreased Flexability Decreased Flexability Developing new competencies may Developing new competencies may

comprimise existing competenciescomprimise existing competencies Increase bureaucratic costsIncrease bureaucratic costs Monopolization of marketsMonopolization of markets

QuizQuiz

What is Horizontal Integration?What is Horizontal Integration?

What are two advantages of What are two advantages of horizontal integration?horizontal integration?

What are two disadvantages of What are two disadvantages of horizontal integration?horizontal integration?

Quiz Quiz

Define Vertical IntegrationDefine Vertical IntegrationWhat are the three types of vertical What are the three types of vertical

integration and explain each.integration and explain each.What are 2 advantages of vertical What are 2 advantages of vertical

integration?integration?What are 2 disadvantages of vertical What are 2 disadvantages of vertical

integration?integration?

THE ENDTHE END