What is Integration Strategy
Integration strategy is a corporate strategy that expands the company into the related business unit or its supply chain by merging and acquisition (M&A) or developing a new business to do so. Normally, the company adapts the integration strategy when they need to reduce cost and increase the size by control over the various supply chains.
The integration strategy has two types include: Horizontal integration and Vertical integration.
- Horizontal integration strategy is a strategy that the company expansion by acquiring or take-over a similar business in the industry.
- Vertical integration strategy is a strategy to expand the business into supply chains (the backward integration) or to distributors (the forward integration) by acquisition or development of new businesses.
Horizontal Integration Strategy
Horizontal integration strategy is a corporate strategy that the company expands by acquiring, merging, or take-over a similar business or a different industry. To put it simply, horizontal integration is about buying other businesses and continuing the acquired business rather than developing a new product or selling the existing product in the existing market.
The horizontal integration allows the company to take advantage from increase revenues and instantly increase market share in the same market. However, horizontal integration strategy does not only benefit the company growth, but the strategy also eliminates a potential competitor (since you acquiring them). This will help the company compete easier in the future with a small number of companies controlling the industry.
For example, a social media company acquires another social media company. A commercial bank acquires an investment bank. These are examples of horizontal integration in real life that you might have heard before include:
- Bank of America acquisition of Merrill Lynch & Co.
- Facebook (now Meta) acquisition of WhatsApp and Instagram
- Microsoft acquisition of Activision Blizzard
- Salesforce acquisition of Slack
- Hewlett Packard Company (HP) acquisition of Compaq
- Pfizer acquisition of amplyx
Vertical Integration Strategy
Vertical integration strategy is a growth strategy that focused on expanding the business into suppliers or distribution channels by acquisition or developing a new business unit for it. The vertical integration strategy is typically adopted when the company wants to eliminate uncertainties and costs from suppliers and distribution channels. This is because buying from its own company is more reliable and cheaper.
There are two main types for the vertical integration strategy include: Forward vertical integration and Backward vertical integration.
- Forward integration is the vertical integration that expands by acquisition or developing a new business unit into distribution channel activities.
- Backward integration is the vertical integration that expands by acquisition or developing a new business unit into supplier activities.
Forward integration strategy is focused on expanding by acquisition or developing a new business unit for distribution activities of the current products to cutting out the middleman. The forward integration helps the company to better control distribution channels and reduce costs from the middleman.
The manufacturing companies that create their own online store and sell their product directly to the customer is an example of the forward integration.
Backward integration strategy is focused on expanding by acquisition or developing a new business unit for supplier activities. The backward vertical integration happens when the organization wants to control over suppliers to achieve efficiency and stable input of materials.
For example, the Tesla company decides to create its own battery plant to produce the battery for its EV cars.