Vertical, Horizontal and Conglomerate Integration

The three types of integration are horizontal integration (joining with a business at the same stage of the same industry), vertical integration (joining with a business at a different stage of the same supply chain), and conglomerate integration (joining with a business in an unrelated industry).

Integration is a form of external growth: a business grows by merging with or taking over another business.

Horizontal integration

A supermarket taking over another supermarket is horizontal integration. Both businesses sell groceries to customers, so they operate at the same stage. The combined business may gain market share and reduce competition, although combining the two businesses can be difficult.

Vertical integration

Vertical integration moves a business along its supply chain: the stages involved in making and selling a product.

• Backward vertical integration means joining with a supplier. For example, a supermarket takes over a farm that supplies its produce.
• Forward vertical integration means joining with a business closer to the customer. For example, a food manufacturer takes over a chain of shops that sells its products.

This can give a business more control over supplies or sales, but it may also have to manage activities outside its existing expertise.

Conglomerate integration

A supermarket taking over an unrelated video game studio is conglomerate integration. The businesses operate in different industries. This could spread risk across different markets, but the supermarket may lack experience in running a game studio.

Exam mistake to avoid: do not identify integration by the size of the businesses. Ask whether they operate at the same stage of the same industry (horizontal), at different stages of one supply chain (vertical), or in unrelated industries (conglomerate). For vertical integration, state which direction the business is moving.