Horizontal and Vertical Integration by using

real world examples

Executive summary
This report presents a summary of two important business strategies called as horizontal
integration and vertical integration. It also includes a discussion of the benefits and
drawbacks of each strategy, as well as real-world examples of companies employing these
approaches. The purpose of this report is to discuss real-world examples of companies that
use Horizontal and Vertical Integration, how they used it and what are the benefits of it.

Table of contents

Vertical Integration Introduction………………………………………………………………

1
Examples for Vertical Integration………………………………………………………….3
Apple………………………………………………………………………………..3
Amazon……………………………………………………………………………..4

Horizontal Integration Introduction…………………………………………………………...5

Examples for Horizontal Integration……………………………………………………...5
Facebook……………………………………………………………………………6
Dialog……………………………………………………………………………….6

Conclusions……………………………………………………………………………………7

References …………………………………………………………………………………….7

Introduction

The present report goes into two noteworthy corporate operations business strategies, namely
Vertical and Horizontal Integration. These strategies are crucial in determining how different
sectors compete, and companies frequently use them to obtain a competitive advantage,
increase operational effectiveness, and increase their market share.The report uses actual
cases to show how effective vertical integration can be. One such example is Apple Inc.,
which is well-known for having immense influence over the duration of its products. The
benefits of this strategy are also shown by Amazon's vertical integration inside its supply
chain, which is highlighted by its AWS segment and large warehouses. After that, the study
provides case studies of effective horizontal integration. Facebook's strategic purchases of
WhatsApp and Instagram provide an example of how this strategy may strengthen a
business's position as a market leader. Organizations looking to expand and survive in the
modern, fast-paced commercial world needs to understand these integration strategies. By
providing an understanding of the advantages and difficulties of both vertical and horizontal

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integration, the report aims to enable companies to choose the best course of action when it
comes to navigating the complex rules of modern marketplaces.

 Vertical Integration
A business approach known as
"Vertical Integration" in economics
entails a corporation owning and
controlling several supply chain stages.
In the other words Simply, Vertical
integration is the combination of two
enterprises operating at various stages
of the production process.The
manufacture of raw materials, the
creation of products, their distribution,
and their retail sale to customers are all
examples of this. Vertical integration
can be conducted by a corporation
expanding into new supply chain
segments or by engaging in mergers and
acquisitions.

Why Vertical Integration?

There are several reasons and advantages why businesses employ vertical integration,
including:

 To cut expenses:
Businesses can save costs related to dealings with external suppliers and distributors
by owning and controlling various supply chain stages. A vehicle business that has its
own steel mill, for instance, could be able to obtain steel at a lower cost than if it had
to purchase it from a third party source.

 To raise the quality of the product or service:

Companies may have better control over the quality of their goods and services via
vertical integration. A food firm, for instance, may be better equipped to guarantee
the quality of the materials in its products if it owns its own farms.

 Lowering company risk

Companies may lower their risk from supply chain interruptions by managing a
number of supply chain phases. For instance, a business that owns its own shipping
fleet could be less impacted by shipping interruptions than a business that depends on
third-party shippers.

 To strengthen market position:

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 Companies with vertical integration may be able to demand higher prices or provide
cheaper pricing than their rivals, giving them a competitive edge in the market. For
instance, a business that controls both its production and distribution processes might
be able to charge customers less than a business that must purchase its goods from a
distributor.
And also here are some disadvantages of Vertical integration

 High initial investment:

Due to the potential requirement for firms to acquire additional enterprises or construct new
facilities, vertical integration might result in a substantial capital expenditure. Vertical
integration can make a firm's operations more difficult because the organization will have to
manage several different businesses.

 Decreased flexibility
Due to possible long-term contracts with suppliers or distributors, vertical integration might
make it more difficult for businesses to adjust to changes in the market.

 Decreased focus
Vertical integration can cause businesses to lose sight of their core competencies because
they spread themselves too thinly across several sectors.

 Decreased effectiveness
Because businesses may not be as adept at controlling every component of the supply chain
as they are at managing their primary business, vertical integration can occasionally result in
inefficiencies.

The various forms of vertical integration come with particular distinct risks in addition to
these basic negatives. Before deciding whether to try vertical integration as a strategy,
businesses should carefully consider the risks and advantages of doing so.

Examples:

1) Apple
Apple employs a high degree of vertical integration, managing
several facets of its supply chain, from product design and
manufacture to customer distribution and sales. This offers Apple several benefits, including
as lower prices, better product features and quality, and faster and more flexible supply.

Here are a few specific examples of Apple's use of vertical integration:

 For use in its iPads, Macs, and iPhones, Apple builds its own processors. As a result,
Apple has more control over the functionality and features of its goods.
 Apple uses its own factory to produce its own iPhones. Apple now has more control
over the timeliness and quality of production.
 The App Store is owned and run by Apple. As a result, Apple has authority over how
apps are distributed across its devices and is able to profit from app sales.
 Apple offers its items to customers directly through its own retail locations. Apple is
able to gather useful information about its consumers as a result and has more control
over the customer experience.

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Apple's success has been significantly attributed to its vertical integration. Apple has been
able to manufacture high-quality items, cut costs, and launch new products fast by managing
several phases of its supply chain. Due to this, Apple now has a competitive edge over its
rivals and is among the most valuable corporations in the world. However, Apple's vertical
integration has also come under fire for raising product costs and giving the business
excessive market power. All things considered, Apple has a complicated vertical integration
plan that has benefits and drawbacks.

2) Amazon
A major contributor to Amazon's success has been
its use of vertical integration. Amazon's ability to
own and manage various stages of its supply chain
has allowed it to lower prices, enhance quality, and gain more market share.

Here are a few particular instances of Amazon's usage of vertical integration:

 Warehouses: Over 200 warehouses are part of the global network that Amazon
maintains. This enables Amazon to provide quick shipping times and store its items
near to its consumers.
 AWS: The most popular cloud computing platform globally is AWS. Amazon powers
its own companies, like Amazon Prime Video and Amazon.com, via AWS. Amazon
offers AWS services to other companies as well.
 Amazon Prime: Access to Amazon Prime Video, free two-day delivery, and other
perks are provided to subscribers of this membership program. Amazon benefits from
increased consumer spending and retention thanks to Amazon Prime.
 Amazon Music : Spotify and Apple Music are competitors of Amazon Music, a
music streaming service. Amazon gains a larger share of the music streaming
industry's value chain thanks to Amazon Music.

 Horizontal Integration

For businesses, horizontal integration is an effective growth strategy. In addition to lowering

competition, it may assist businesses in gaining economies of scale, improving product
differentiation, and growing their market share. It's crucial to remember, too, that horizontal
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integration can also result in anti-competitive behavior and increased consumer costs.
Horizontal integration may help firms remain ahead of the curve and hold onto their market
share in a world where enterprises are always developing and inventing. There exist several
rationales for firms to choose for horizontal integration.

Why Horizontal Integration ?

Here are some advantages of Horizontal Integration

1) To take a larger market share:

Businesses can enhance their market share to gain more power in their respective industries
by purchasing or merging with rival businesses. They may be able to control price and
distribution better as a result, which may increase their customer attraction.

2) To achieve economies of scale:

Businesses can save costs and improve efficiency by expanding the scope of their activities.
Customers may pay less as a result, and the business may make more money.

3) To increase product differentiation:

Businesses may stand out from the competition and draw in more clients by expanding their
product offerings or introducing fresh services. This might be crucial in markets with fierce
rivalry and several options for customers.
4) To decrease competition:
Businesses may increase their earnings and market share by cutting down on the number of
rivals in the industry. For businesses that are up against fierce rivalry from both domestic and
foreign opponents, this can be a successful strategy.

5) In order to enter new markets:

Without spending money on new infrastructure or creating new products, horizontal
integration can reach new markets. Companies can get started in a new industry and begin
making money right away by purchasing or merging with an existing business in that sector.

6) To obtain access to new technologies:

Businesses may swiftly introduce new technologies to the market and obtain an advantage by
purchasing or merging with a firm that has created them.

Here are some disadvantages of Horizontal Integration

 higher prices for consumers

 Creation of monopolies
 Reduced flexibility and innovation
 Increased complexity

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Examples:

1) Facebook
By using horizontal integration, Facebook has been able to grow into
new areas and retain its position as the leader in the social media
industry. For $1 billion, Facebook purchased Instagram, and for $19
billion, it purchased WhatsApp. Through these purchases, Facebook
gained control over two of the most widely used social media networks
worldwide and removed two possible rivals. Regulators, on the other
hand, are also interested in it because they believe Facebook's
dominant position in the market gives it an unfair edge over rivals. The
following are ways in which Facebook uses horizontal integration.

 Instagram and WhatsApp

Since Facebook purchased them, both of these have seen incredible growth. There are
already more than 1 billion active users on Instagram and more than 2 billion active users on
WhatsApp. Facebook's reach and user engagement have both increased as a result of these
investments.

 Giphy
Facebook now has access to this database and is able to incorporate GIFs into its services and
products thanks to its acquisition of Giphy.

 Facebook's video-streaming service

Although this service rivals YouTube, it also enhances Facebook's other offerings, including
its messaging and social networking platforms.

 The marketplace option on Facebook

eBay is a competitor for this tool, but it also enhances Facebook's other offerings, including
its messaging and social networking platforms.

In general, Facebook has had great success with horizontal integration. It helped the business
in growing into new areas, retaining its position of power in the social media space, and
creating user-friendly new goods and services.

2)Dialog Axiata

The biggest telecommunications provider in Sri Lanka, Dialog

Axiata, employs horizontal integration in a variety of methods,
such as:

 Purchasing rival telecommunications firms

Dialog purchased Lanka Bell, a fixed-line telecom provider, in 2005. With this purchase,
Dialog was able to expand the services it provides to its clients and gain traction in the fixed-

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line industry. For instance, Dialog was able to provide its clients with internet, mobile, and
fixed-line service bundles.
 Expanding new markets:
Dialog has also grown internally and via partnerships to enter fresh markets including pay-
TV and mobile banking. This has aided Dialog in expanding its customer base and growing
its business. As an example, Dialog's pay- TV service is currently among Sri Lanka's most
well-liked pay- TV options.

 Purchasing assets for infrastructure:

In addition, Dialog has bought other infrastructure assets, including towers and underwater
cables. As a result, Dialog now has more control over its infrastructure, which has enhanced
network performance. Customers now find Dialog's network more appealing since it is
quicker and more dependable as a result.

By utilizing horizontal integration, Dialog has been able to hold onto its supremacy in the Sri
Lankan telecom industry. Additionally, it has aided in the company's product and service
development as well as its market expansion.

Conclusion

As demonstrated by Apple's success, vertical integration, In conclusion, enables firms to

manage several stages of the supply chain, producing benefits including cost savings, higher
product quality, risk reduction, and improved market position. It does have some potential
disadvantages, though, such large start-up costs and less flexibility. As seen by Facebook's
strategic purchases, horizontal integration, on the other hand, seeks to increase market share
through combinations of companies. It offers benefits like economies of scale and less
rivalry. However, there are drawbacks as well, such as increased consumer costs and the
possibility of monopolies. Any organization hoping to prosper and grow must make well-
informed judgments about vertical and horizontal integration in today's changing business
environment.

References

https://knowledge.wharton.upenn.edu/article/vertical-integration-works-for-apple-but-it-
wont-for-everyone/
https://insightsunboxed.com/amazon-business-model-re-examined-ziv-baida/
https://www.linkedin.com/pulse/horizontal-integration-when-facebook-bought-instagram-
pei-ying-chua
https://www.dialog.lk/financial-report-archives
https://www.netsuite.com/portal/resource/articles/erp/horizontal-integration.shtml

K.H.A Kariyawasam
AS2021499
ECN 202 2.0 Industrial Economics
University of Sri Jayewardenepura

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