Question 1; What is the difference between Horizontal and Vertical Integration.

Any
practical examples of these two integrations with reference to managerial economics.
Answer;
When companies become large enough and have enough capital, they often decide to acquire
other businesses. This is known as "integration strategy." There are two basic forms of
integration: horizontal and vertical.
Horizontal Integration:
 Definition of Horizontal Integration
1. The merger of two or more firms, which are engaged in the same line of business and
their activity level is also same; then this is known as Horizontal Integration. The
product may include complementary product, by-product or any other related product,
competitive product or entering into the product’s repairs, services, and maintenance
section.
Horizontal Integration reduces competition between firms in the market, as if the producers
of the product get combined they can create a monopoly. However, it can also create an
oligopoly if there are still some independent manufacturers in the market.
It is a approach used by most of the companies to expand its size and achieve economies of
scale due to increased production level. This will help the company to approach new
customers and market. Moreover, the company can also diversify its products and
services.[advantage].
2. Horizontal integration is another competitive strategy that companies use. An
academic definition is that horizontal integration is the acquisition of business
activities that are at the same level of the value chain in similar or different industries.
In simpler terms, horizontal integration is the acquisition of a related business: a fast-food
restaurant chain merging with a similar business in another country to gain a foothold in
foreign markets.
3. Horizontal Integration is a type of business expansion strategy, which comprises
a company acquiring other companies from the same business line or at the same level
of value chain so as to subside competition.
4. The merger of two or more firms, which are engaged in the same line of business and
their activity level is also same; then this is known as Horizontal Integration. The
product may include complementary product, by-product or any other related product,
competitive product or entering into the product’s repairs, services, and maintenance
section.
Due to lesser competition, there operates an environment of consolidation and monopoly in
the industry. However, it can also create an oligopoly if there are still some independent
players in the market.
The company can also diversify its products and services. When a company expands using
horizontal integration, it achieves growth in its operational size and economies of scale due to
increased production level.
This helps the company in spanning its reach to a larger customer base and market.
Horizontal Integration often raises antitrust concerns, as the combined firm will have a larger
market share than either firm did before merging.
Some recent example to quote such a strategy in action would be Walt Disney Company’s
$7.4 billion acquisition of Pixar Animation Studios in 2006.
5. When a company takes up the same type of products at the same level of production
or marketing process in a merger, it is said to be a horizontal integration strategy. It is
a business expansion strategy wherein an organization merges with the same product
line of its rival. For example, when a shoe making company takes over its rival shoe
making company, it is called horizontal integration (or a merger). This means
companies merge at the same part of the supply chain in the same or different
industries for the sole purpose of buying rival’s business with a view to expand
geographically, in order to increase the market share or to benefit from economies of
scale. This strategy may be frequently adopted to maintain stronghold in the business.
For example, Disney merging with Pixar, Porsche merging with Volkswagen, and
Quaker Oats with Snapple, are some of the best examples of horizontal integration.

BREAKING DOWN Horizontal Integration

Horizontal integration is a competitive strategy that can create economies of scale, increase
market power over distributors and suppliers, increase product differentiation and help
businesses expand their market or enter new markets. By merging two businesses, they may
be able to produce more revenue than they would have been able to do independently.
However, when horizontal mergers succeed, it is often at the expense of consumers,
especially if they reduce competition. If horizontal mergers within the same industry
concentrate market share among a small number of companies, it creates an oligopoly. If one
company ends up with a dominant market share, it has a monopoly. This is why horizontal
mergers are heavily scrutinized under antitrust laws.
When is horizontal integration attractive for a business?
A company can think of acquisitions and mergers for horizontal integration in the following
situations:
a. When the industry is growing
b. When rivals lack the expertise that the company has already achieved
c. When economies of scale can be achieved
d. When the company can manage the operations of the bigger organisation efficiently,
after the integration

Advantages of Horizontal Integration

Companies engage in horizontal integration to benefit from synergies. There may be
economies of scale or cost synergies in marketing, research and development (R&D),
production and distribution. Or there may be economies of scope, which make the
simultaneous manufacturing of different products more cost-effective than manufacturing
them on their own. Proctor & Gamble’s 2005 acquisition of Gillette is a good example of a
horizontal merger which realized economies of scope. Because both companies produced
hundreds of hygiene-related products from razors to toothpaste, the merger reduced the
marketing and product development costs per product.
Synergies can also be realized by combining products or markets. Horizontal integration is
often driven by marketing imperatives. Diversifying product offerings may provide cross-
selling opportunities and increase each business’ market. A retail business that sells clothes
may decide to also offer accessories, or might merge with a similar business in another
country to gain a foothold there and avoid having to build a distribution network from
scratch.
Reducing Competition
The real motive behind a lot of horizontal mergers is that companies want to reduce
“horizontal” competition in the form of competition from substitutes, competition from
potential new entrants and the competition from established rivals. These are three of the five
competitive forces that shape every industry and which are identified in Porter’s Five Forces
model. The other two forces, the power of suppliers and customers, drive vertical integration.

Disadvantages of Horizontal Integration

Like any merger, horizontal integration does not always yield the synergies and added value
that was expected. It can even result in negative synergies which reduce the overall value of
the business, if the larger firm becomes too unwieldy and inflexible to manage, or if the
merged firms experience problems caused by vastly different leadership styles and company
cultures. And if a merger threatens competitors, it could attract the attention of the Federal
Trade Commission.
Practical Examples
1. Examples of horizontal integration in recent years include Marriott's 2016 acquisition
of Sheraton (hotels) Anheuser-Busch InBev's 2016 acquisition of SABMiller
(brewers), AstraZeneca's 2015 acquisition of ZS Pharma (biotech), Volkswagen’s
2012 acquisition of Porsche (automobiles), Facebook's 2012 acquisition of Instagram
(social media), Disney's 2006 acquisition of Pixar (entertainment media) and Mittal
Steel’s 2006 acquisition of Arcelor (steel).
2. One of the most definitive examples of horizontal integration was Facebook's
acquisition of Instagram in 2012 for a reported $1 billion. Both Facebook and
Instagram operated in the same industry (social media) and shared similar production
stages in their photo-sharing services. Facebook sought to strengthen its position in
the social sharing space and saw the acquisition of Instagram as an opportunity to
grow its market share, reduce competition, and gain access to new audiences.
Facebook realized all of these through its acquisition. Instagram is now owned by
Facebook but still operates independently as its own social media platform.
3. Another notable example of a horizontal integration was Walt Disney Company's $7.4
billion acquisition of Pixar Animation Studios in 2006. Disney began as an animation
 studio that targeted families and children. However, the entertainment giant was
facing market saturation with its current operations along with creative stagnation.
Pixar operated in the same animation space as Disney, but its (digitally) animated
movies used cutting-edge technology and an innovative vision. The deal is now
widely considered to have literally and figuratively reanimated Disney, expanded its
market share, and boosted its profits.
4. The 1998 merger of two major oil companies, Exxon and Mobil, was the biggest in
corporate history at the time. The integration combined the first and second largest
energy corporations in the United States.
Officially, Exxon bought Mobil for $75.3 billion, and the purchase enabled Exxon to
gain access to Mobile's gas stations as well as its product reserves. Thanks to the
pooling of resources, increased efficiency in operations, and streamlining of
procedures, today, ExxonMobil is one of the biggest oil companies in the world. The
Daily Records lists it as the third largest in terms of production as of 2019, while
Oil&GasIQ, a platform for thought leadership to professionals in the hydrocarbons
sector, cited Exxon as the fourth largest in terms of production in 2018.
5. Practical (India) – ACC & Damodar Cement
ACC (Associated Cement Companies) Cement expanded its coverage in the eastern
part of India by acquiring Damodar Cement in 2005. It had earlier expanded in the
ready-mix concrete plant section but this was the first expansion with regards to
cement capacity. The chairman of ACC then described the merger as one that would
bring in operating efficiencies, productivity, and economies of scale.
The merger was said to increase the capacity by 1.5 lakh ton. Post the merger, ACC
further invested $3 million on improving the grinding capacity and better utilization
of raw materials in Damodar cement. Usually, the horizontal integrations such as
these are subject to high scrutiny such that it may not allow a monopoly in a particular
sector to the adversity of the customers there.
6. Vodafone was established in 1983 as Racal Telecom in the United Kingdom while
Hutchison Essar was founded in 1985 in Hong Kong as a telecommunication services
provider to several Asian countries. Sometimes, it is just not the acquiring entity’s
interest that gives rise to the merger, rather it could also be the underperforming entity
that attracts the merger. For Hutchison, the urban markets were below par with falling
average revenue per user. It wanted additional funds to expand its business operations
in Europe. Overall the lower returns on its investments were not making things easier
for it.
For Vodafone, the objective was to consolidate its position as one of the leading
telecommunications companies with increased expansion in markets such as India
where Hutchison had already established itself for a few years. The western markets
were saturating and as a means for a growth trajectory in developing countries, this
deal sounded just about right.
Vodafone acquired a 67% stake in Hutchison Essar with the deal valued at $11.1
billion. There was a considerable increase in net profit ratio, return on investment
and earnings per share post the merger.

Vertical Integration
 Definitions of Vertical Integration

1. Vertical integration is when a company controls more than one stage of the supply
chain. That's the process businesses use to turn raw material into a product and get it
to the consumer.
There are four phases of the supply chain: commodities, manufacturing, distribution,
and retail. A company vertically integrates when it controls two or more of these
stages.
2. Vertical integration is a strategy whereby a company owns or controls its suppliers,
distributors, or retail locations to control its value or supply chain. Vertical integration
benefits companies by allowing them to control the process, reduce costs, and
improve efficiencies. However, vertical integration has its disadvantages, including
the significant amounts of capital investment required.
Netflix is a prime example of vertical integration whereby the company started as a
DVD rental company supplying film and TV content. The company's executive
management realized they could generate more revenue by shifting to original content
creation. Today, Netflix uses its distribution model to promote their original content
alongside films from major studios.
3. vertical integration occurs when a company merges with another company from
which it buys products or to which it sells products. An example of this would be if
an auto manufacturing company merged with a glass maker and a rubber maker
because glass and rubber go into making cars. The glass and rubber companies were
once part of the supply chain for the automaker so this merger is vertical. [ I can use
this example in upstream and downstream monopoly].
4. In strategic management, vertical integration is a firm’s ownership of vertical related
activities meaning the firm takes complete control of more than one stage of the
supply chain. While horizontal integration refers to combinations between rivals,
vertical integration involves companies that have a buy-sell or upstream-downstream
relationship. Vertical integration could be of two types: backward and forward
integration. Backward integration means the firm takes control and ownership of
producing its own inputs, while forward integration means the firm takes ownership
and control of its own customers. When companies integrate vertically they do so in a
complete manner; they move backward or forward decisively resulting in a full
integration. One of the main benefits of vertical integration is that it can lower some
of the risk a company faces in the marketplace.[advantage]
5. Vertical Integration is a type of business expansion strategy, which comprises a
company acquiring various entities engaged in different stages of the value chain.
In Vertical Integration, two firms that are doing business for the same product but are
currently at different levels of the supply chain process, merge into the single entity
which opts to continue the business, on the same product line as it was doing before
integration.
Vertical Integration is an expansion strategy used to gain control over the entire
industry. There are mainly two forms of Vertical Integration namely, Forward
Integration and Backward Integration.
 A merger situation where the company acquires control over its distributors, then it is
referred to as downstream or forward integration whereas when the company acquires
control over its supplier, then it is upstream or backward integration.
6. Vertical integration is a competitive strategy by which a company takes complete
control over one or more stages in the production or distribution of a product. It is
covered in business courses such as the MBA and MiM degrees.
A company opts for vertical integration to ensure full control over the supply of the
raw materials to manufacture its products. It may also employ vertical integration to
take over the reins of distribution of its products.
A classic example is that of the Carnegie Steel Company, which not only bought iron
mines to ensure the supply of the raw material but also took over railroads to
strengthen the distribution of the final product. The strategy helped Carnegie produce
cheaper steel, and empowered it in the marketplace.
7. Vertical Integration is between two firms that are carrying on business for the same
product but at different levels of the production process. The firm opts to continue the
business, on the same product line as it was done before integration. It is an expansion
strategy used to gain control over the entire industry.

 Types of Vertical Integration

There are various strategies that companies use to control multiple segments of the supply
chain. Two of the most common methods of vertical integration include backward and
forward integration.
Backward Integration
Backward integration is when a company expands backward on the production path into
manufacturing, meaning a retailer buys the manufacturer of their product. An example of
backward integration might be Amazon.com Inc. (AMZN), which expanded from an online
retailer that sold books to becoming a book publisher. Amazon also owns warehouses and
parts of its distribution channel.
Forward Integration
Forward integration is a strategy that companies use to expand by purchasing and controlling
the direct distribution or supply of a company's products. A clothing manufacturer that opens
its own retail locations to sell its product is an example of forward integration [monopoly
example]. Forward integration helps companies cut out the middleman by removing
distributors that would typically be paid to sell a company's products—reducing their overall
profitability.
An example of vertical integration is a mortgage company that originates and services
mortgages. The company lends money to homebuyers and collects their monthly payments,
rather than specializing in one of the services.
Another example of vertical integration is a solar power company that produces photovoltaic
products and also manufactures the cells used to create those products. In doing so, the
company moved along the supply chain to assume the manufacturing duties, conducting
backward integration.
Balanced integration
It involves taking over all parts of the production process and is also called a vertical
monopoly. Andrew Carnegie's previously mentioned steel company was involved in balanced
integration. This form of vertical integration is less common than forward or backward
integration, as it is largely illegal in the United States due to antitrust legislation.
When is vertical integration attractive for a business?
Several factors affect the decision-making that goes into backward and forward integration. A
company may go in for these strategies in the following scenarios:
a. The current suppliers of the company’s raw materials or components, or the
distributors of its end products, are unreliable
b. The prices of raw materials are unstable or the distributors charge high fees
c. The suppliers or distributors earn big margins
d. The company has the resources to manage the new business that is currently being
taken care of by the suppliers or distributors
e. The industry is expected to grow significantly

 Advantages and Disadvantages of Vertical Integration

Vertical integration can help companies reduce costs and improve efficiencies. However,
there are some disadvantages to implementing a vertical integration strategy.
Advantages
I. Decrease transportation costs and reduce delivery turnaround times
II. Reducing supply disruptions from suppliers that might fall into financial hardship
III. Increase competitiveness by getting products to consumers directly and quickly
IV. Lower costs through economies of scale, which is lowering the per-unit cost by
buying large quantities of raw materials or streamlining the manufacturing process
V. Improve sales and profitability by creating and selling its own brand
Disadvantages
I. Companies might get too big and mismanage the overall process
II. Outsourcing to suppliers and vendors might be more efficient if their expertise is
superior
III. Costs of vertical integration such as purchasing a supplier can be quite significant
IV. Increased amounts of debt if borrowing is needed for capital expenditures

Practical Examples
1. An example of vertical integration is the technology giant, Apple Inc. (AAPL), which
has retail locations to sell its products as well as manufacturing facilities around the
globe. Apple manufactures its custom A-series chips for its iPhones and iPads. It also
 manufactures its custom touch ID fingerprint sensor. Apple opened up a laboratory in
Taiwan for developing LCD and OLED screen technologies in 2015. It also paid
$18.2 million for a 70,000-square-foot manufacturing facility in North San Jose in
2015. These investments, among others, allow Apple to move along the supply chain
in backward integration, giving it flexibility and freedom in its manufacturing
capabilities.
However, the company still has suppliers that include Analog Devices, which
provides the touchscreen controllers for iPhones. Also, Jabil Circuit supplies phone
casings for Apple from its manufacturing facilities in China.
The company has also integrated forward as much as backward. The Apple retail
model, one where the company's products are almost exclusively sold at company-
owned locations, excluding Best Buy and other carefully selected retailers, allows the
business to control its distribution and sale to the end consumer.
2. Live Nation and Ticketmaster
The merger of Live Nation and Ticketmaster in 2010, created a vertically integrated
entertainment company that manages and represents artists, produces shows, and sells
event tickets. The combined entity manages and owns concert venues while also
selling tickets to the events at those venues. The integration was a forward integration
from the perspective of Ticketmaster and a backward integration from the perspective
of Live Nation.
3. Amazon.com Inc., for example, became vertically integrated backward when it
expanded its business to become both a book retailer and a book publisher. Amazon
began as an online book retailer in 1995, procuring books from publishers. In 2009, it
opened its own dedicated publishing division, acquiring the rights to both older and
new titles. It now has several imprints. Although it still sells books produced by
others, its own publishing efforts have boosted profits by attracting consumers to its
own products, helped control distribution on its Kindle platform, and given it leverage
over other publishing houses.
4. Perhaps one of the best examples of emerging vertical integration on the Internet is
retail giant Amazon. Amazon's competitors include online and traditional brick-and-
mortar retailers. However, Amazon has managed to emerge as a dominant seller in
many areas, such as video streaming and traditional retail items, such as clothing.
Constantly seeking to integrate, Amazon has experimented with drones for delivering
packages, which would eliminate reliance on delivery companies such as FedEx or
UPS. This is particularly important for Amazon, which promises free two-day
delivery for its Prime members.
5. For example, Andrew Carnegie is famous for pioneering the concept of vertical
integration in order to corner the steel market by taking control of all aspects of the
production process. He did not just own steel mills but also iron-ore barges, coal and
iron fields and the railroads. He would sell directly to users, bypassing middlemen
and their fees. As a result of his vertical integration across the industry, no
competitors could afford to compete with Carnegie Steel's prices, and he held a
monopoly over the industry for years.
6. More modern and less monopolistic examples of vertical integration include Google's
2001 acquisition of Motorola to produce smartphones and Ikea's 2015 purchase of
Romanian forest land to produce its own raw furniture materials.
7. Apple is the best example of vertical integration; it is the biggest and a renowned
manufacturer of smartphones, laptops and so on. It controls the whole production and
distribution process itself, from the beginning to the end. Another example of this is
Alibaba, a Chinese e-commerce company, that owns the entire system of payment,
delivery, search engine and much more.