Horizontal And Vertical Integration Made EASY! Advantages, disadvantages and examples.

Dr Hayley Stainton

24 Oct 202108:02

Summary

TLDRThis video by Dr. Haley Stanton explains horizontal and vertical integration in the travel and tourism industry. Horizontal integration involves merging companies at the same supply chain level, like tour operators, to expand market share and reduce competition. Vertical integration occurs when a company controls multiple levels of the supply chain, like TUI handling everything from travel agents to airlines. Both strategies help companies become more competitive, but each has advantages and challenges. The video also provides examples from brands like Virgin, TUI, and Disney, making the concepts clear and relevant.

Takeaways

🔄 Horizontal integration refers to the merging of companies at the same level of the supply chain, such as two tour operators joining forces.
📈 Companies use horizontal integration to grow, capture new markets, and increase their market power, often reducing costs and increasing profits.
🌍 Horizontal integration allows companies to expand geographically, as seen in tour operators merging from different countries.
⚖️ Disadvantages of horizontal integration include potential staffing and legal issues, especially when merging across borders.
🛫 Travelopia and the Virgin Group are examples of horizontal integration in the travel industry, where companies under the same umbrella operate at the same level of the supply chain.
📊 Vertical integration involves a company taking control of various levels of the supply chain, from production to sales, like TUI managing all aspects of its holidays.
🔑 Vertical integration allows for better control, smoother processes, and diversification, which can balance financial risks across different business areas.
🚧 One disadvantage of vertical integration is that less competition can lead to complacency, and companies may struggle to excel in every part of the supply chain.
🎢 Disney and TUI are examples of both vertical and horizontal integration, controlling multiple levels of the supply chain in their respective industries.
🌐 Integration strategies, whether horizontal or vertical, are vital for businesses to remain competitive, not only in travel and tourism but across many industries.

Q & A

What is horizontal integration in business?
-Horizontal integration is a competitive business strategy where a company acquires or merges with another business at the same level of the supply chain, either in similar or different industries.
Can you provide an example of horizontal integration in the travel industry?
-An example of horizontal integration in the travel industry is a ski tour operator merging with a summer sun tour operator. Both companies operate at the same level of the supply chain as tour operators.
What are some reasons why horizontal integration occurs in the travel and tourism industry?
-Horizontal integration may occur to allow businesses to grow, achieve better value for money, overcome competitors’ lack of expertise, or create a larger organization with more market power.
What are the advantages of horizontal integration?
-The advantages include economies of scale, the ability to produce at a reduced cost, capturing new markets, gaining a larger market share, and reducing competition.
What are the disadvantages of horizontal integration?
-Disadvantages include staffing and organizational challenges, legal implications due to mergers across countries with different laws, and potential integration difficulties.
What is an example of horizontal integration in practice?
-An example is Travelopia, which owns a variety of specialist travel brands that operate at the same level in the supply chain, such as Oz Travel and American Holidays.
What is vertical integration in business?
-Vertical integration is a strategy where a company takes control of multiple levels of the supply chain, from manufacturing to sales and aftercare, ensuring more control over the entire process.
What are the advantages of vertical integration?
-Vertical integration provides more control over the supply chain, allows for better regulation, enables diversification of income, and helps increase barriers to entry for competitors.
What are the disadvantages of vertical integration?
-Disadvantages include a potential drop in standards due to reduced competition, less flexibility in production, and difficulties in managing all aspects of the business.
Can you give an example of vertical integration in the travel industry?
-A good example is TUI, which owns tour operations, travel agents, airlines, and in-destination services, allowing them to manage all parts of the travel experience from start to finish.

Outlines

00:00

📊 Horizontal and Vertical Integration in the Travel Industry

In this video, Dr. Haley Stanton explains the important concepts of horizontal and vertical integration in business, particularly in the travel and tourism industry. These strategies make companies more competitive by allowing them to control different levels of the supply chain. The video promises to break down what these strategies mean for businesses and consumers.

05:02

🔄 Understanding Horizontal Integration

Horizontal integration is a competitive business strategy where a company acquires or merges with another business at the same level of the supply chain. This could be within the same or different industries. A key example is when two tour operators merge, such as a ski tour operator merging with a summer tour operator. The benefits include achieving economies of scale, expanding into new markets, and reducing competition. However, it may bring challenges such as legal issues and organizational restructuring.

🌍 Horizontal Integration in Practice

Horizontal integration offers several benefits, including market expansion and reduced competition. Dr. Stanton highlights Travelopia, the world's largest collection of specialist travel brands, as an example. Travelopia includes various tour operators at the same level of the supply chain. Virgin Group's airlines, operating in different countries, also demonstrate horizontal integration by operating at the same supply level across multiple regions.

🏗️ Introduction to Vertical Integration

Vertical integration is the opposite of horizontal integration. It involves a company taking control of different levels of the supply chain to regulate the production, sales, and other processes. By managing everything from manufacturing to sales, companies like TUI ensure consistency throughout the supply chain. This can offer companies greater control, more income diversification, and a competitive advantage by creating barriers for new entrants.

🚀 Advantages of Vertical Integration

Vertical integration allows companies to regulate their operations better and compensate for underperforming areas by redistributing resources. TUI, for example, owns travel agents, airlines, and destination services, creating a seamless experience for customers. However, the strategy can reduce flexibility, as companies may struggle to excel in all areas of the supply chain, and reduced competition can lead to a drop in service standards.

🎡 Examples of Vertical Integration in Practice

The video presents TUI and Disney as prominent examples of vertical integration. TUI's control over tour operations, airlines, and in-destination services allows it to dominate the travel industry, especially after Thomas Cook's collapse. Disney similarly integrates its theme parks, shops, movies, and TV channels. Both companies also employ horizontal integration in some areas. Ultimately, vertical and horizontal integration strategies are crucial not just in travel but across many business sectors.

🎓 Importance of Understanding Integration Strategies

In conclusion, understanding horizontal and vertical integration is essential whether you're running a business or studying travel and tourism. These strategies help companies stay competitive, expand their reach, and control their supply chains. Dr. Stanton invites viewers to subscribe for more content on travel and tourism.

Mindmap

Keywords

💡Horizontal Integration

Horizontal integration is a business strategy where a company merges with or acquires another company at the same level of the supply chain in a similar or different industry. In the video, an example given is when two tour operators, like a ski tour operator and a summer sun tour operator, merge. This helps businesses grow, achieve economies of scale, and reduce competition by consolidating their market share.

💡Vertical Integration

Vertical integration occurs when a company takes control of multiple levels of its supply chain, from production to distribution. This allows businesses to have more control over their operations, ensuring smoother processes. In the travel industry, an example is TUI Holidays, which controls everything from tour operations to airlines and travel agents. Vertical integration can help companies maintain consistency and reduce costs but can also limit flexibility.

💡Economies of Scale

Economies of scale refer to the cost advantages that businesses can achieve when they increase production and reduce costs per unit. Through horizontal integration, companies can expand their operations, produce on a larger scale, and potentially lower costs. In the video, this is described as a major benefit of horizontal integration, where larger companies can either pass savings on to customers or increase their profit margins.

💡Market Share

Market share refers to the portion of a market controlled by a particular company. Horizontal integration allows companies to grow their market share by acquiring competitors or entering new markets. In the video, expanding into different geographical areas like merging a French tour operator with a Spanish one helps companies capture new markets, reducing competition and increasing overall market presence.

💡Supply Chain

The supply chain is the sequence of processes involved in the production and distribution of a product. In both horizontal and vertical integration, companies strategically control or merge with other businesses at various points in the supply chain. For instance, TUI’s vertical integration example in the video shows how the company controls the full process—from tour operations to customer service in travel destinations.

💡Merger

A merger is the combination of two companies into one entity. The video uses the example of two tour operators merging to explain horizontal integration, where companies at the same level of the supply chain join forces. Mergers can increase market power and allow companies to share resources, but they can also lead to challenges in staffing, organizational structure, and legal issues.

💡Competitive Strategy

Competitive strategy refers to the methods businesses use to gain an advantage over competitors. Horizontal and vertical integration are both forms of competitive strategies, helping companies reduce competition, expand their market share, and control more of their supply chain. In the video, horizontal integration allows companies to eliminate competitors, while vertical integration helps them control more aspects of their operations.

💡Barriers to Entry

Barriers to entry are obstacles that make it difficult for new competitors to enter a market. Vertical integration can increase these barriers, as companies with more control over their supply chain can dominate the market, making it harder for new players to compete. The video explains how TUI’s vertical integration gives it a competitive advantage, particularly after the collapse of Thomas Cook.

💡Geographical Expansion

Geographical expansion occurs when a company extends its operations into new regions or countries. Horizontal integration often facilitates this expansion, as seen in the example of a French tour operator merging with a Spanish one. Expanding geographically allows companies to access new markets, increase their customer base, and diversify their operations, as described in the video.

💡Diversification

Diversification is a strategy where a company expands into new areas or industries to reduce risk and increase profitability. In the video, vertical integration is linked to diversification, as companies like TUI own different types of businesses such as airlines, tour operations, and in-destination services. This allows them to generate income from multiple sources and compensate if one part of the business is underperforming.

Highlights

Horizontal and vertical integration are important strategies in business, including in the travel and tourism industry.

Horizontal integration refers to the acquisition of business activities at the same level of the supply chain in the same or different industries.

An example of horizontal integration is a ski tour operator merging with a summer sun tour operator, both being on the same level of the supply chain.

Horizontal integration occurs to achieve better value for money, grow market share, or when competitors lack expertise.

One advantage of horizontal integration is economies of scale, where a larger company can reduce costs and increase market share.

Horizontal integration allows businesses to penetrate new markets, including geographical expansion.

However, horizontal integration can cause staffing and organizational issues, and legal complexities can arise when merging companies across countries.

Travelopia is an example of horizontal integration in travel, as it encompasses a collection of specialist travel brands all at the same level of the supply chain.

Virgin Group's airlines across different regions, such as Virgin Atlantic, Virgin Australia, and Virgin America, also exemplify horizontal integration.

Vertical integration is when a company takes over others at different levels within the supply chain, such as from manufacturing to sales.

An advantage of vertical integration is increased control over the supply chain, leading to better regulation of processes.

Vertical integration allows companies to diversify their income and balance out different areas of the business.

One disadvantage of vertical integration is that less competition may reduce the drive for high standards.

TUI is a prime example of vertical integration, owning tour operations, travel agents, airlines, and in-destination services.

Disney is another example of both horizontal and vertical integration, owning theme parks, shops, movies, TV channels, and other businesses across various levels of the supply chain.