The terms that I have been given to define are Vertical and Horizontal integration. In order to fully understand what these words mean I am going to start off by defining each word to the best of my ability and also seeing the advantages and disadvantages of both systems of production.
Let us start with vertical integration. When looking up the definition on Google, the first thing that comes up is “(N.) The combination in one company of two or more stages of production normally operated by separate companies.” With vertical integration, costs can be decreased and efficiency can be increased by expanding the business into “separate steps that are on the same production path.” This allows a company to control many levels of the production chain. A current example of this would be Apple. According to Time Magazine, Apple has brought back the vertical integration model. In order to be vertically integrated, a company has to control two or more of the production aspect. In the case of Apple, they create the hardware and software “under one roof” and have been doing this for 35 years. Apple manufactures both their chips and sensors that go into the IPhones and IPads, allowing the company to have a bit more freedom and flexibility when it comes creating products for us, the consumer. It also ensures quality control on product thus allowing for a decrease in repairs and returns. Many other companies are trying to follow in Apple’s footsteps, but become vertically integrated is not something that can happen overnight.
Although being a vertically integrated company in the long run sounds great with being able to control many aspects of the manufacturing processes like Apple has, it also has a few disadvantages. As mentioned before, this process does not occur over night, and for new small companies, can cost a lot of money. According to Gaebler, if a company cannot keep up with operations it will limit the amount of production. Ideally, the vertical integration business strategy works best for larger companies such as Apple Inc.
On the flipside of things, we also have Horizontal Integration. Again, as defined by Business Dictionary, Horizontal Integration is “the merger of companies at the same stage of production in the same or different industries.” An easy example of this would be oil companies. Oil companies integrate refineries in order expand their growth. Take Exxon Mobil for example, they merged with other production companies and distributors in order to “strengthen its position in the industry.” This type of business strategy allows the company to grow in size, reduce competition, access new markets, and it costs less. This may all seem great, but these can lead to monopolies (see Kieran post regarding monopoly).
Although there are some advantages to this strategy, there are disadvantages, just like everything else. One of these disadvantages is the fact that horizontally integrated companies decrease the value of the other companies that are involved. Because there is a potential to create a monopoly, there can be many legal issues that arise when using the horizontal integration strategy. When merging to create one large company, that company also loses its flexibility in the markets (Strategic Management Ins