Horizontal and Vertical Integration (Business Growth Strategy)

Summary

This video explains key concepts related to external growth strategies, focusing on horizontal and vertical integration. Vertical integration includes forward and backward movements within the supply chain, such as manufacturers acquiring distributors or retailers buying wholesalers. Horizontal integration involves businesses at the same stage of the supply chain merging or acquiring competitors, like Marriott buying Starwood Hotels. The video also touches on diversification, which involves unrelated industries. Through examples like the Booker Group’s acquisition of Londis and IKEA’s purchase of forest resources, the video highlights how businesses grow through strategic acquisitions within or across supply chains.

Takeaways

• 😀 Vertical and horizontal integration are key strategies for external business growth through mergers and acquisitions.
• 😀 Vertical integration can be forward (toward the consumer end) or backward (toward the raw material supply end) in the supply chain.
• 😀 Forward integration involves a company acquiring distributors or retailers to move closer to the end consumer.
• 😀 Backward integration involves a company acquiring its suppliers to secure resources and control the production process.
• 😀 Horizontal integration occurs when a company acquires a competitor at the same stage of the supply chain.
• 😀 Horizontal integration helps companies expand market share and reduce competition by merging with other companies at the same level.
• 😀 A real-world example of forward integration is the Booker Group acquiring Londis and Budgens convenience stores in 2016.
• 😀 An example of backward integration is IKEA’s acquisition of forests and wood-cutting operations in Romania and Bulgaria in 2016.
• 😀 Horizontal integration can also be seen in Marriott’s acquisition of Starwood Hotels, resulting in Marriott becoming the world’s largest hotel chain.
• 😀 These integration strategies are often used in takeovers and mergers to increase control, secure resources, or eliminate competition in the market.

Q & A

What is horizontal integration?

Horizontal integration refers to a strategy where a company acquires or merges with a competitor at the same stage of the supply chain, typically within the same industry.

Can you provide an example of horizontal integration from the transcript?

Yes, Marriott's acquisition of Starwood Hotels is a clear example of horizontal integration, where Marriott merged with a competitor in the hotel industry, becoming the world's largest hotel chain.

What is vertical integration, and what are its two types?

Vertical integration involves a company expanding its control over different stages of the supply chain. It can be forward integration (moving up the supply chain to acquire distributors or retailers) or backward integration (moving down the supply chain to acquire suppliers of raw materials).

How does forward integration work, and can you give an example?

Forward integration involves a company moving forward in the supply chain, typically by acquiring a distributor or retailer. An example from the transcript is the Booker Group, which acquired Londis and Budgeons, moving from wholesale to retail.

What is an example of backward integration provided in the video?

An example of backward integration is Ikea's 2016 purchase of forests and timber-related operations in Romania and Bulgaria, ensuring access to raw materials for its manufacturing process.

Why might a company engage in horizontal integration?

A company might engage in horizontal integration to increase its market share, reduce competition, and expand its reach in the same industry or market.

What are the advantages of vertical integration for a company?

Vertical integration allows a company to gain greater control over its supply chain, reduce costs, ensure a steady supply of raw materials or distribution channels, and increase efficiency.

What is diversification, and how does it differ from horizontal and vertical integration?

Diversification, also known as conglomerate integration, involves a company acquiring or merging with a business in a completely different industry. Unlike horizontal and vertical integration, diversification has no connection to the company's existing supply chain.

How does a supply chain relate to vertical and horizontal integration?

A supply chain illustrates the flow of goods from raw materials to final consumers. Vertical integration involves moving up or down this chain, while horizontal integration occurs at the same stage of the supply chain, usually by acquiring a competitor.

What are the key factors to remember when studying horizontal and vertical integration?

The key factors to remember are the direction of integration (vertical or horizontal) and the nature of the supply chain. Vertical integration involves moving up or down the chain, while horizontal integration involves acquiring a competitor at the same level of the chain.