One of the companies’ techniques in staying competitive and improving their business is to perform integration. There are two kinds of integration: vertical and horizontal integration. The two kinds differ in their approach to integration and have their own strengths and limitations. Integration, however, does not only refer to the built of the company. It can only be applied to the roles and ranks of the employees in the company. This paper discusses what vertical and horizontal integrations are.
An analysis will also be done as to the impact of these kinds of integration in a company’s role and functions as well as its built to remain competitive. Vertical Integration Companies, especially manufacturers, who want to maximize their profits and gain more control in their products and their distribution often resort to vertical integration. Vertical integration is a business strategy wherein a company either acquires or builds another company that will work with the main company to supply the inputs or produce the outputs of the company.
An example of a company applying vertical integration is the Carnegie Steel company. “The company controlled not only the mills where the steel was manufactured, but also the mines where the iron ore was extracted, the coal mines that supplied the coal, the ships that transported the iron ore and the railroads that transported the coal to the factory” (“Vertical Integration,” 2006). With this example, vertical integration can somehow be thought of some form of cartel. Vertical integration has three types as described in an article in Wikipedia entitled Vertical Integration (2006):
• In backward vertical integration, the company sets up subsidiaries that produce some of the inputs used in the production of its products. For example, an automobile company may own a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their final product. […] • In forward vertical integration, the company sets up subsidiaries that distribute or market products to consumers or use the products themselves.
• In balanced vertical integration, the company sets up subsidiaries that both supply them with inputs and distribute their outputs. Vertical integration in terms of employee hierarchy is described by Dorf (1999) as “’flattening out’ the hierarchy. ” This integration minimizes the huge gap among different ranks in the company. Galbraith (1994, as cited in Dorf, 1999) described vertical integration as not really eliminating hierarchy but focusing on “eliminating the dysfunctional effects” of hierarchy, which is the gap in communication between employees due to the differences in ranks.
Horizontal Integration Horizontal integration in supply chain is somehow similar to vertical integration in terms of gaining control. It is a business strategy of manufacturing companies to try to expand their target market. A company who used to sell only to middle social class would do horizontal integration if they want to reach the lower end or the high-end market. This is done by setting up subsidiaries, either by acquisition or building a new one, that will sell similar products but to different markets.
Walters (n. d.) enumerated the different strengths of this kind of integration: “economies of scale, synergy – economies of scope, defense against substitutes, reduction in competition, fulfilling customer expectations, and increased negotiation power – get more leverage over powerful suppliers or customers. ” He also enumerated the following limitations: • Synergies may be more imaginary than real. A famous example was SAAB with its cars and aircraft. • Substitutes market is often very different. To turn an acquisition into a success is a big and lengthy management challenge. • Reduction in competition, or even a monopoly, may lead to anti-trust issues.
In terms of employee hierarchies, horizontal integration is defined by Galbraith (1994, as cited in Dorf, 1999) “in terms of coordinating different functions (or business units or divisions) without communicating through the hierarchy. In other words, people in different functions communicate directly with each other instead of through their managers. ” This is similar to the functional teams where members work with each other and decide among themselves. Impact of Integration In supply chain management, production and operations management, integration may be helpful in many ways.
Depending on which type of integration will be implemented, companies will gain more ownership of their products and be able to fully control them. With vertical integration, the company can be assured of quality of the inputs and raw materials that will be used in production because it has control over its sourcing and, if applicable, manufacturing. There is no need to hire contractors or outsource these processes or search for parts and raw materials from outside sources. There will also be no need to point fingers in case something goes wrong in acquisition of materials because the same company would be liable.
The company can also be assured of revenue if the company itself will setup a subsidiary who will market the products, like a coffee blender putting up a coffee shop. In terms of horizontal integration, the company can maximize their profits in expanding their market share by setting up subsidiaries. However, companies doing integration just need to be careful in doing so. They should do extensive research before deciding on applying integration because it is also possible to lose money in this business strategy.
For example, the subsidiaries that they put up may not be as successful as the mother company and might end up in bankruptcy if the business is really unlucky. In terms of employee hierarchy, integration is also a good method in empowering employees. By bridging the gap between ordinary employees and managers, a company can be more successful because there will be open communication on all levels. Integration would also help in making quick but sensible decisions and giving employees more flexibility in their work. Employees would definitely like the fact that they are being valued by the company by empowering them.
Dorf, R. C. (1999). The Technology Management Handbook. Boca Raton, FL: CRC Press. Geng, H. (2004). Manufacturing Engineering Handbook. New York: McGraw-Hill. Horizontal Integration. (2006). Wikipedia. Retrieved July 21, 2006, from http://en. wikipedia. org/wiki/Horizontal_integration Vertical Integration. (2006). Wikipedia. Retrieved July 21, 2006, from http://en. wikipedia. org/wiki/Vertical_integration Walters, E. (n. d. ). Horizontal Integration. Retrieved July 21, 2006, from http://www. 12manage. com/methods_horizontal_integration. html