Any successful business person wants to be in charge of its business operations. Sometimes, a businessman has to play a leading role in order to get things in line. Integrations strategy is also about taking control over your business operations.
Today, we’ll discuss integration strategy and its types with examples.
What is Integration Strategy?
Integration strategy also goes by the name of the management control strategy. As the name implies, it provides the business an option to have control over various processes like competitors, suppliers, or distributors.
Types of Integration Strategies
Business-integration strategy has two major types and sub-types; horizontal integration and vertical integration. They’re as follows;
Businesses use horizontal strategy when they’re facing competition. A horizontal integration strategy is when a company acquires the supply chain system of the different/same industries that are operating at the same level.
In other words, horizontal integration in similar businesses is when a fast-food brand merges with the chain of the related business in the other country and foreign market.
Strategic Management Reasons
As we know that horizontal integration is when a business acquires and merges with a similar/dissimilar company. Businesses do it for various reasons like entering into the newer markets, expand the market, lower the risks, develop a unique product, achieve economies of scale, and increasing the company’s size and capabilities.
Standard Oil bought 40 refineries is a very good example of horizontal integration.
Horizontal integration usually has long-term benefits on the strategy and planning of the business. Therefore, the company has to make the right choice. The acquired and merging business should be suitable to market and customers’ expectations. The company needs to perform a comprehensive analysis before of its resources before the integration.
When Horizontal Integration is Attractive
A business should follow the horizontal integration in terms of merging and acquisition when
- the business could handle the operations of the bigger company
- integration could provide the economies of scale advantage
- competitors don’t have the experience and experience that the company has already attained
- the business is expanding its operation
Advantages of Horizontal Integration
Some of the main advantages of horizontal integration are as follows;
- Enter into New Market. If the business acquires/merges with a foreign company, it makes it easier for the acquiring business to enter into the new market.
- Market Power. When a business acquires and merges with another foreign company, the customers’ market of the acquired company also comes along with it during the acquisition. It would help the company to access the bigger for the distribution of its products.
- Differentiation. Acquisition and merging provide an opportunity for both companies to share their expertise and develop something new. It results in the form of a new differentiating product.
- Economies of Scale. When two businesses and companies integrate their experiences and expertise for mass production, it reduces the overall manufacturing cost.
Disadvantages of Horizontal Integration
The acquiring business should be able to handle the bigger company in order to achieve the advantages of horizontal integration. If it doesn’t, the following disadvantages would happen;
- No Benefits. The merging companies expect certain benefits from the horizontal integration, but the hardware and software of either of the companies don’t match up. The expected synergies turned out to be nonexistent from the integration.
- Rigidness. Sometimes horizontal integration brings a lot of benefits in many ways. But it becomes bigger and loses its management and operational flexibility. The functionality of the company becomes so rigid that it would become very difficult to change it.
- Legal Issues. The acquiring and merging companies should keep in mind the legal issues. If the alliance of two firms becomes a monopoly and it threatens to end the business of competitors permanently, then it would result in serious legal issues.
Businesses also use vertical integration when they’re facing competition. Vertical integration allows the company to have control over various stages of supply, distribution, and production.
Companies choose vertically-integrated strategy to make sure that they have complete control over the raw material, supply chain, and manufacturing processes. Most importantly, the purpose of vertical integration is to take charge of the distribution channels of the company’s products.
For instance, Carnegie Steele Company acquires the iron mines to guarantee the consistent supply of raw material. Next, the company controls the railroads to support the distribution of raw material and final products. That’s how Carnegie Steele Company manufactures cheap steel and controls the steel market.
Types of Vertical Integration
Forward Integration. When a business takes over the distribution system and sells its products/services directly to the customers. For instance, an automotive and mobile brand opens up its retail showrooms to sell vehicles and mobile phones directly to the end consumers.
Backward Integration. When a business takes control over the supply of the raw material, it’s backward integration. For instance, a supermarket and a fruit seller buy the vegetable and fruit farm to control the supply of its products. An automotive company buys the electronic parts and tire manufacturing companies to ensure the availability of material.
As the name implies, balanced integration is a combination of forward integration and backward integration. Here the business acquires both raw material supply chain and distribution channels to control everything.
When Vertical Integration is Attractive
Vertical integration is suitable for the company under the following circumstances;
The market and the industry is growing at a significant rate.
- Suppliers and distributors control a major portion of the business, and the company has the resources to buy either one or both of them.
- The profit margin of suppliers and distributors is high.
- The price range of distribution and suppliers is volatile and inconsistent.
- Distributors and suppliers are unreliable and they delay the delivery of the products and material and it’s costing the company.
Advantages of Vertical Integration
- Effectiveness. When a company buys either one of the channels or both, its productivity and core effectiveness would increase.
- Cost & Profit. The most important benefit of vertical integration that it helps the company to lower the cost and the business makes more profit as a result.
- Efficient. When a company takes over the distribution channels, it allows the company to carefully deliver the final products.
- Smooth Supply. It allows the company to have a smooth supply of raw material without inconsistency.
Disadvantages of Vertical Integration
- Management Issues. When a company integrates with either one of the channels, it changes the company’s focus on the supply chain or the distribution channels. The company’s core products suffer resultantly.
- Sustainability Problem. The company increases the supply of raw materials to achieve economies of scale. It loses control over the production of raw material.
- Low Quality. When you remove the competition from the market, the quality of the raw material or the finished goods would fall.
Examples of Integration Strategies
Facebook and Instagram
The socal app Facebook is the world’s largest social media platform and Instagram is also a different type of social media platform. Facebook horizontally integrated with Instagram and increased the customer’s market share and competitive advantage.
Apple is one of the five world’s top tech companies. The company uses the balance vertical integration of manufacturing the parts of its iPhones and Apple laptops. The brand also owns the retail stores to sell its finished products.
Netflix is one of the world’s largest paid online video streaming companies. The company follows the forward vertical integration by controlling the distribution of its video content.