Business Growth Strategy - Horizontal and Vertical Integration
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Business Growth Strategy – Horizontal and Vertical Integration

hi there let's take a look at a couple of terms and concepts that are related to external growth that may come up in your exam horizontal and vertical integration now I've mentioned that these terms are usually made in connection with transfer explains the reasons why firms engage in external growth such as takeovers and mergers and well it's a relatively important concept it's important to keep it fairly simple so in terms of the direction of integration as a result of these external growth strategies the first thing to remember is that there are there is a possibility of going in a vertical direction either forward forward integration or backwards backward integration and the alternative is to go from side to side what's there in as horizontal integration now to understand the nature of these terms the important thing is just to reflect on what happens in what's known as the supply chain in the business let's look at a simple example of a supply chain this will help us explain this these concepts of integration a supply chain might be a simple one like this you've got businesses involved in the the supply of raw materials those raw materials may then be put into a manufacturing process the output from a manufacturing process might then go to distributors and those distributed in turn are likely to pass the finished goods on to retailers and of course then onto final consumers like you and I that is an example of the supply chain working from left to right from raw materials to manufacturing onto the distributor and finally onto the retailer's and in terms of integration a business may decide to try to move up the supply chain or forward of course it could also move down the supply chain all backwards so in terms of takeovers these terms let's just quickly define what they mean and then give you a couple of examples to illustrate them in terms of forward integration what we're looking at there is moving up moving forward through the supply chain for example a manufacturer failing to buy a distributor of its products we've seen that in a supply chain you can go backwards so backwards integration vertical integration involves a business moving earlier in the supply chain for example a retailer buying a wholesaler or a manufacturing business of buying a supplier of raw materials and we've mentioned that you can also go from side to side a horizontal integration strategy involves buying a business that is operating at the same stage of the supply chain for example a manufacturer buying another manufacturer a retailer buying a retailer there is one fourth direction of integration which we're not going to cover in this video we'll do a separate video on diversification where the takeover or the merger has no connection with the business and the supply chain it's an entirely different industry it's called diversification or conglomerate integration and so we'll deal with that one in a separate video well hopefully that's helped set the scene in terms of these different types of term let's have a look at a couple of examples just to help illustrate them forward integration here's a here's a takeover that took place in 2016 and it involved a business called the Booker group the book of groups one of the UK's largest wholesalers runs a bit like Costco well very much like Costco runs large wholesale operations which serve individuals but mainly small retailers and what the book a group did was it agreed a takeover of a very large chain of convenience store the retail business called Landis and budgets over 2000 stores there that was an example of a distributor acquiring a retailer in other words moving up or forward up the supply chain for integration here's an example of backwards integration the business on the right you'll certainly be familiar with IKEA one of the world's largest an iconic global retailer of furniture and household goods and what I care did in 2016 was to make a significant purchase of forests and their associated equipment the woods the woodcutters and collectors in Romania and Bulgaria what it was doing it was an it's wanting to ensure that its manufacturing business have access to raw material so it is moving back into the supply chain an example of backward integration and finally here's an example of horizontal integration there are lots of these you'll often see retailers buying other retailers in this case this was one of the world's largest hotel businesses married buying a business called Starwood Hotels which includes a whole bunch of brands including Sheraton Hotels and as a result of that takeover which was finally approved in 2016 merit became the world's largest hotel chain a classic example of horizontal integration where you've got a retail or service business buying a very close competitor so there we go that's an overview of these concepts called horizontal and vertical integration

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17 thoughts on “Business Growth Strategy – Horizontal and Vertical Integration

  1. Some great study resources on business growth strategy can be found here

  2. instead of vertical integration he keep saying backward forward! Like i was lost i was looking for vertical now i am doubting everything initially i got from this

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