Different Types of Business Integrations in Details

Let’s take a look at different types of business integrations when merging with, acquiring or taking over another business. Each of those business integrations will have distinct impact on the market structure and various stakeholders of a business.

This article also includes advantages and disadvantages of four kinds of business integration.

Horizontal Integration

This integration is the most common type. Horizontal Integration is the integration with a firm in the same industry and at same stage of production, e.g. two fruit farms in the primary sector, two clothes manufacturers in the secondary sector or two cinemas in the tertiary sector. Horizontal mergers, acquisitions and takeovers do not represent growth in the industry, but a larger market share leading to greater market power and dominance in the industry for the amalgamated business.

Primary sector business + Primary sector business

Secondary sector business + Secondary sector business

Tertiary sector business + Tertiary sector business

Examples of Horizontal Integration:

Example 1: In 2001, PepsiCo, an American food and beverage company that is one of the largest in the world, acquired Quaker Oats Company, a Chicago-based American manufacturer of oatmeal and other food and beverage products.

Example 2: In 2007, Nike, a company that designs, develops, markets and sells high quality footwear, apparel, equipment as well as sports accessories and services, bought Umbro, another similar company in the sports apparel industry.

Example 3: In 2008, Tata Motors, the biggest automobile manufacturing company in India selling cars to the mass market, acquired Jaguar and Land Rover, British automobile producers which are both considered luxury brands.

Example 4: In 2013, Carlsberg, the Danish beermaker, acquired Chongqing Brewery, China’s largest beer producer.

Advantages of Horizontal Integration include:

Elimination of competitors. It eliminates one competitor quickly either in a friendly way in case of mergers and acquisitions, or in a hostile way in case of a takeover.
Increase in market share. An opportunity to increase market share fast as the business gains access to all customers of the target company at once.
Access to new resources. Merging can be a very good way to gain access to new technology, innovative products, patents or trademarks without wasting precious time on researching and developing those that may take many years.
Market dominance. As a result of synergy, the ‘new’ amalgamated business will be more able to dominate the whole market comparing with the power of the two separate smaller firms.
Production rationalization. Scope for rationalizing production as the whole production process and output will now be concentrated on one site as opposed to being spread across two or more different locations. The reorganization of a company will increase operating efficiency.
Benefits of economies of scale. There will be possible internal economies of scale because the new business will be much larger in size. For example, the new business will purchase more raw materials in bulk from its suppliers.
Increased power over suppliers. Suppliers will now sell and supply to one company instead of two. The amalgamated company will purchase much more raw materials that will be transported together, therefore it will have more to say when negotiating prices and delivery terms.
Easier access to finance. If a business is short of cash or afraid of being unable to compete with larger competitors on the market, merging can help a business survive. Applying for bank loans and negotiating lower interest rates is much easier for large businesses.

Disadvantages of Horizontal Integration include:

Bad image. Rationalization may bring bad publicity to the whole business due to layoffs of workers, or shutting down duplicated offices or factories.
Poor employee motivation. Workers may lose job security and motivation as a result of seeing other employees being made redundant. It can surely lead to demotivation, hence lower productivity of the remaining workforce.
Less choices for customers. Consumers will now have less choices of goods and services as there are less companies on the market to buy from. Some unprofitable products may also be discontinued to maintain profit margins.
Higher scrutiny. Increased market share resulting from eliminating competition may lead to monopoly investigations and anti-trust probes launched by the government. It may happen, if the combined business exceeds certain market share limits or competes unfairly. There will also be more informal scrutiny from the general public too.

Vertical Integration Backward

Vertical Integration Backward is the integration with a firm in the same industry, but at the earlier stage of production, with a supplier of the existing business, e.g. an ice-cream manufacturer merges with, acquires or takes over a milk supplier.

Manufacturer <- Retailer

Supplier <- Manufacturer

Examples of Vertical Integration Backward:

Example 5: A chain of coffee shops in the tertiary sector acquires a coffee manufacturer from the secondary sector.

Example 6: A coffee manufacturer from the secondary sector merges with its supplier of coffee beans from the primary sector.

Advantages of Vertical Integration Backward include:

Assured supply of inventory. It gives the company total control over quantity, quality, price and delivery terms of supplies including raw materials, components and semi-finished goods used in the production process. This growth strategy mainly helps the manufacturer to secure access to raw materials at the lowest price possible.
Improved quality of raw materials. Vertical Integration Backward encourages joint research and development into quality of supplies of components, so in the long-term the quality of finished goods will be improved as well.
Easier to control costs. The business can ensure that the cost of raw materials will enable the business to minimize the cost of production, hence maximizing Gross Profit margins.
Control over supplies to competitors. Because of owning and controlling the supplier, the business also has control over supplies of raw materials to competitors. The supplier can be prevented from supplying any raw materials to other businesses.
Career opportunities for employees. There are greater career opportunities for workers to work in a different sector of the economy.
Better products. Due to improvements in quality of supplies, final consumers will obtain improved products, therefore customer satisfaction and customer loyalty will be improved as well.
Profit margins absorbed. Now all the profits made by the supplier will be absorbed by the business.

Disadvantages of Vertical Integration Backward include:

No experience with managing supply chains. Current managers may lack experience of managing a supplying company as the targeted company operates in a completely different sector of the economy and has a different business model. A successful furniture producer will not necessarily know how to manage a forestry company trading timber.
Complacency among suppliers. Supplying business may become complacent due to having a guaranteed customer. The supplier will most likely be also prevented from selling to competing businesses.
Less choices for customers. Control over supplies to competitors may limit competition and choice for consumers. It is because competitors will not be able to produce certain products without specific raw materials.

Vertical Integration Forward

Vertical Integration Forward is the integration with a firm in the same industry, but at the later stage of production, with a customer of the existing business, e.g. a shoe manufacturer merges with, acquires or takes over a shoe retailer.

Supplier -> Manufacturer

Manufacturer -> Retailer

Examples of Vertical Integration Forward:

Example 7: A coffee manufacturer from the secondary sector acquires a chain of coffee shops in the tertiary sector.

Example 8: A supplier of coffee beans from the primary sector merges with a coffee manufacturer in the secondary sector.

Advantages of Vertical Integration Forward include:

Control of the whole Marketing Mix. The business is now able to control Product, Price, Promotion and Distribution of its own products.
Assured outlet for the products. Now, because of owning and controlling the retailer, the business also has control over the products being sold to final customers. The business secures an outlet for the firm’s products gaining control over the display of the products in the shop. The business may now exclude competitors’ products, as the retailer can be prevented from selling those products, therefore lowering their competitiveness.
Career opportunities for employees. There are greater career opportunities for workers to work in a different sector of the economy.
Greater job security. Workers will have greater job security because the business has secure outlets.
Profit margins absorbed. Now all the profits made by the retailer will be absorbed by the business.
Access to information. The business can do primary market research directly with customers through the retailer, therefore obtaining valuable market information will be easier and cheaper.

Disadvantages of Vertical Integration Forward include:

No experience with managing retail outlets. Current managers may lack of experience in the tertiary sector of the industry. It is because a successful manufacturer does not necessarily make a good retailer as different expertise is required to be successful in different sectors of the economy.
Negative reactions from customers. Because the competitors’ products are excluded from appearing in retail outlets, many consumers may suspect uncompetitive activity and react negatively as they have less choices.
Less customers. Therefore, consumers may resent lack of competition in the retail outlet because of the withdrawal of competitor products, so sales revenue may be endangered.

Conglomerate Integration

Conglomerate Integration is the integration with a firm in a different industry, e.g. a cosmetics manufacturer merges with, acquires or takes over an energy drink manufacturer.

Business in Industry A <- Business in Industry B

Conglomerate Integration is about amalgamation of businesses that are in completely distinct or diversified markets. The main reason for this integration is diversification. The parent company is referred to as a holding company and is responsible for the objectives and long-term policy of the group, but allows the companies to operate as separate entities.

Examples of Conglomerate Integration:

Example 9: Berkshire Hathaway owns businesses in a vast range of industries, including insurance, property, clothing, meat products, flight services, home furnishing, news media, confectionery, beverages and carpet making.

Advantages of Conglomerate Integration include:

Increased diversification. This integration diversifies the business away from its original industry, markets and customers, hence provides a chance for business growth in new areas.
Access to new markets. The business benefits from globalization and quick access to new markets both at home and abroad. Conglomerate Integration may bring the business into much faster-growing markets, or markets with larger customer base.
Spreading risk. As the business now operates in various markets selling different products, this will spread risk because different markets are at different stages of the market cycles, e.g. when one industry is facing the recession, other industries might be booming.
Greater job security. Workers will have more job security because risks are spread across more than one industry.
Career opportunities for employees. There are greater career opportunities for workers to work in a different sector of the economy and in different markets.
Influx of new ideas. As the conglomerate owns many different businesses operating in many different markets, ideas can be exchanged between managers and workers.

Disadvantages of Conglomerate Integration include:

Lack of experience in other markets. The business may lack of management experience in the acquired-business sector.
Shifting away from core business activities. There could be a lack of clear focus and direction now that the business is spread across more than one industry.
Asset stripping. A conglomerate or a holding company may acquire another company with the sole intent of selling off the parts that yields a profit. In the short-term profits will be gained, but these actions do not contribute toward increasing value in the long-term.

To sum up, Horizontal Integration happens between two companies that are in the same industry and at the same stage of production.

Vertical Integration happens when two firms being at different stages of production join together, e.g. a manufacturer of chocolate merges with a merchant of milk. Vertical Integration can be either Forward or Backward. A Forward one happens when a business involved in extraction of raw materials in the primary sector joins with a manufacturer operating in the secondary sector. And, the Backward one is when a retailer from the tertiary sector joins with a manufacturer from the secondary sector.

Conglomerate Integration occurs when two companies, which are not related to each other, join together regardless of the stage of production.