VERTICLE INTERGRATION
Vertical integration is the degree to which a firm owns its upstream suppliers and its
downstream buyers. Contrary to horizontal integration, which is a consolidation of
many firms that handle the same part of the production process, vertical integration
is typified by one firm engaged in different aspects of production (e.g. growing raw
materials, manufacturing, transporting, marketing, and/or retailing).
There are three varieties: backward (upstream) vertical integration, forward
(downstream) vertical integration, and balanced (horizontal) vertical integration.
In backward vertical integration, the company sets up subsidiaries that produce some
of the inputs used in the production of its products. For example, an automobile
company may own a tire company, a glass company, and a metal company. Control of these
three subsidiaries is intended to create a stable supply of inputs and ensure a
consistent quality in their final product. It was the main business approach of Ford
and other car companies in the 1920s, who sought to minimize costs by centralizing the
production of cars and car parts.
In forward vertical integration, the company sets up subsidiaries that distribute or
market products to customers or use the products themselves. An example of this is a
movie studio that also owns a chain of theaters.
In balanced vertical integration, the company sets up subsidiaries that both supply
them with inputs and distribute their outputs.
If you view McDonald's, for example, as primarily a food manufacturer, backwards
vertical integration would mean that they would own the farms where they raise the
cows, chickens, potatoes and wheat as well as the factories that processes everything
and turns it all into food. Forwards vertical integration would imply that they own
the distribution centers for every area and the fast food retailers. Balanced vertical
integration would mean that they own all of the mentioned components
HORIZONTAL INTERGRATION
Horizontal integration describes a type of ownership and control. It is a strategy
used by a business or corporation that seeks to sell a type of product in numerous
markets. To get this market coverage, several small subsidiary companies are created.
Each markets the product to a different market segment or to a different geographical
area. This is sometimes referred to as the horizontal integration of marketing. The
horizontal integration of production exists when a firm has plants in several
locations producing similar products. Horizontal integration in marketing is much more
common than horizontal integration in production. It is contrasted with vertical
integration.
A monopoly created through horizontal integration is called a horizontal
monopoly.
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