Definition of Horizontal Integration in a Supply Chain

Supply chains are messy. Prices rise abruptly, products or raw materials become unavailable, shipping and transport are overloaded, and competing vendors struggle for customers. Integrating horizontally or vertically can make things much more organized. However, it takes money to pull off, and it's not the right solution for every company.

Tip

Horizontal integration in supply chains means that one company dominates or owns one level of the chain. When a raw materials supplier or wholesaler buys up its competition, that creates horizontal integration.

Vertical and Horizontal Integration: Definition

Integrating a supply chain usually means bringing multiple companies under one roof, according to American Express. For example, suppose you're a retailer with a chain of appliance stores. Your company has cash to spare, so you buy up your suppliers, giving you control over price. You have a guaranteed steady supply even if your competitors are willing to outbid you. That's an example of vertical integration.

Companies further up the supply chain also engage in vertical integration. If you're a jewelry wholesaler selling to retailers, buying up a few stores protects you against competition from other wholesalers. When you have a guaranteed market for your jewelry, that fact removes a lot of uncertainty from your business planning.

The horizontal integration definition, according to the Corporate Finance Institute, is when a company at one level of the supply chain gains control of its competition. For example, suppose you're an organic granola maker competing with other companies for space in grocery stores. You reduce the competition by buying some of your competition, creating a horizontal value chain.

Manufacturing Business Technology explains that the horizontal integration definition also includes forming a horizontal value chain by tight collaboration with the competition. Big customers can carry out horizontal integration by fitting you and your competitors into their logistics system, smoothing out competition for their convenience.

Horizontal Value Chain: Pros and Cons

When you're a struggling startup, shooting for horizontal integration may be unobtainable. Gaining control of your horizontal level of the supply chain by buying your competitors takes money. It's easiest when the industry is growing, and your competitors have fewer financial resources or a weaker position in the market.

There are considerable advantages to horizontal integration. There's less competition for suppliers or customers. You can cut costs by sharing R&D, marketing and advertising, and distribution channels. When you integrate horizontally, you may gain access to new products made by other companies or new markets they've already penetrated. As you grow, you may be able to dictate terms to your suppliers.

However, like every other business strategy, horizontal integration has weaknesses. Company culture is one: If you and your acquisitions have radically different approaches to doing business, getting two sets of employees on the same page may be impossible. If everyone learns to do it your way, that reduces flexibility. The larger the industry segment you run, the more difficult maintaining control becomes.

Another problem is that forming a horizontal value chain may not work out well for consumers. If you become dominant, you have greater power to set prices or control the products that are available. That kind of clout can run afoul of antitrust laws or draw attention from regulators.

References

• American Express: Should You Expand Through Horizontal and Vertical Integration?
• Corporate Finance Institute: Horizontal Integration
• Manufacturing Business Technology: Horizontal and Vertical Integration in Industry 4.0