To grow a business there are two ways: vertical or horizontal integration. What are the differences between them?
What are the best strategies for business growth? It is a difficult question to answer given the current situation that is extremely changeable. Since the advent of globalization and the introduction of internet in business management, the environment has become extremely dynamic, so that today there is no magic formula to answer the question.
In this context it is worth noting that when a company wants to expand normally has two ways, vertical integration or horizontal integration. What are the differences between them?
Vertical integration happens when a company engages in new operations in order to reduce costs and streamline processes typically performed with other companies in their process of production and / or distribution. With this type of integration, companies develop new aspects of business operations as they incorporate other than their core business activities. An example is a construction company that decides to stop hiring transport companies for their material and then buy their own trucks and warehouse distribution, in order to carry out these activities in the form and timing decide. It is not an easy way since it involves new operations but can be very effective in efficiency and cost reduction.
Horizontal integration, unlike the above, is a process through which companies are usually integrated in the same line. The acquisition of these results in an expansion of existing operations instead of creating new ones. This type of expansion is recommended when a company wants to enter new markets, such as starting operations in another country and instead of reaching break through itself, it acquires a local company who knows the environment, which greatly facilitates management of business. A good example of this is what made Scotiabank in Colombia in 2012, where he acquired 51 percent of the shares of Banco Colpatria at that time was the fifth largest banking group in the country. This one of the most interesting and successful expansion of banking in Latin America was closed.
Benefits of horizontal integration
- Decreases competition from other companies, since one of them is acquired.
- It is a relatively affordable way to enter new markets.
- Know-how and knowledge of the environment takes advantage of many years.
Benefits of vertical integration
- Reduce total costs by internalizing the value that other companies would take as profit.
- More efficient supply chain.
- Streamline processes.
As you can see, only in these two forms of growth, there are many ways and alternatives, however, other shapes could also be considered as line extensions or diversifications, which, as mentioned at the beginning, leads to conclude that there are no magic formulas and that the best option for growth depend on the circumstances, the environment, opportunities and company history.