Supply Chain

Becoming Familiar with Vertical

and Horizontal Integration
Objectives
 Define horizontal integration
 List and explain the advantages and
disadvantages of horizontal integration
 Define vertical integration
 Explain the three types of vertical
integration
 List and explain the advantages and
disadvantages of Vertical integration
 Define Horizontal Integration
• Horizontal Integration is the addition of other
business activities at the same level of the value
chain
• Examples:
– The Standard Oil Company buying 40 refineries
– An automobile manufacturer buying a sport utility
vehicle manufacturer
– A radio station that also owns a newspaper and
magazine
 Advantages of Horizontal
Integration
• Economics of scale: Selling more of the
same product in different parts of the world
• Economics of Scope: Sharing resources
common to different products. “Synergies”
• Increased Market Power
• Reduction in cost
 Disadvantages of Horizontal
Integration
• Costs
• Increased work load
• Increased Responsibilities
• Anti-trust issues
• Creating a monopoly
 Define Vertical Integration
 is the degree to which a firm owns its
upstream suppliers and its downstream
buyers.
 Example:
 Carnegie Steel Company owned mills where
the steel was manufactured, mines where the
iron ore was extracted, coal mines that
supplied the coal, ships and railroads that
transported the material, etc.
 Advantages of Vertical Integration
 Reduce transportation cost
 Improve supply chain coordination
 More oppertunities to differeniate by
means of increased control of inputs
 Capture upstream and downstream profits
 Increase entry barriers to potiental
competitors
 Disadvantages of Vertical
Integration
 Capacity balancing: Making sure that
inputs will match ouputs at all levels
 Potentially higher cost due to the lack of
supplier compition
 Decreased Flexability
 Developing new competencies may
comprimise existing competencies
 Increase bureaucratic costs
 Monopolization of markets
 Quiz
 What is Horizontal Integration?

 What are two advantages of horizontal

integration?

 What are two disadvantages of horizontal

integration?
 Quiz
 Define Vertical Integration
 What are the three types of vertical
integration and explain each.
 What are 2 advantages of vertical
integration?
 What are 2 disadvantages of vertical
integration?
THE END