Horizontal Vs Vertical Integration — Transcript

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1. 0:00hello and welcome to today's lesson
2. 0:02where we're looking at horizontal and
3. 0:03vertical integration which are two terms
4. 0:07referring to an organization's strategic
5. 0:09approach when expanding externally so
6. 0:12through the acquisition of or a merger
7. 0:15with another company now to understand
8. 0:19horizontal and vertical integration you
9. 0:21must first begin by understanding what a
10. 0:23supply chain is so a supply chain is
11. 0:27simply the high level chain of
12. 0:29activities that must take place to
13. 0:31create a product or service so let's
14. 0:34take a look at an example of a simple
15. 0:36Supply Chain by imagining you own a
16. 0:39business selling paper diaries that you
17. 0:42sell direct to Consumers via your
18. 0:44website your supply chain might look
19. 0:46something like this so first one company
20. 0:50will create the raw material so the
21. 0:52paper for your Diaries next using that
22. 0:56paper a second company will manufacture
23. 0:59your diary and send them to you and
24. 1:02finally you will sell your Diaries
25. 1:04direct to Consumers from your website so
26. 1:08these three businesses each doing
27. 1:10something unique constitute a very basic
28. 1:14supply
29. 1:15chain so now that you understand the
30. 1:18basics of Supply chains you're in a
31. 1:20position to understand both horizontal
32. 1:22and vertical integration as you can see
33. 1:25here when you integrate vertically you
34. 1:27buy or merge with a company in your
35. 1:29existing existing supply chain
36. 1:31conversely when you integrate
37. 1:33horizontally you acquire a business at
38. 1:36the same stage of the supply chain but
39. 1:38in a different supply chain to your own
40. 1:41now thinking back to our diary example a
41. 1:44horizontal integration you could make
42. 1:46would be to acquire another Diary seller
43. 1:49just like your business in contrast of
44. 1:52vertical integration might be to acquire
45. 1:54your diary manufacturer a company is
46. 1:57vertically integrated when it owns more
47. 2:00than one level of its supply chain now
48. 2:03there are in fact two types of vertical
49. 2:06integration forward and backward forward
50. 2:09integration occurs when you acquire a
51. 2:11company higher up your supply chain and
52. 2:14backward integration or backward
53. 2:16vertical integration occurs when you
54. 2:18acquire a company lower down your supply
55. 2:20chain so why would you choose to perform
56. 2:23either a horizontal or vertical
57. 2:25integration well that will become clear
58. 2:28shortly when we look at some real
59. 2:30examples of each type of integration but
60. 2:33for now let's recap the different types
61. 2:35of
62. 2:36integration now one thing to note here
63. 2:39is that there's a special case we
64. 2:40haven't yet covered that of a
65. 2:43conglomerate and this happens when
66. 2:45there's no apparent connection between
67. 2:47your company and the company you are
68. 2:49purchasing a conglomerate is simply a
69. 2:52collection of businesses grouped
70. 2:53together under one umbrella
71. 2:56company another thing to note is that
72. 2:59sometimes an organization will
73. 3:01vertically integrate in both directions
74. 3:03forward and backward and this is often
75. 3:06referred to as Blended vertical
76. 3:08integration so let's take a look at an
77. 3:11example of horizontal integration in
78. 3:14this case we'll look at Volkswagen's
79. 3:16acquisition of scoda so as you can see
80. 3:19in this diagram Volkswagen here and
81. 3:21scoda over here both have their own
82. 3:24Supply chains but they exist at the same
83. 3:28level and so they're able to
84. 3:30horizontally integrate now there are
85. 3:33many reasons why Volkswagen bought scoda
86. 3:36including access to New Markets in
87. 3:38Eastern Europe the ability to sell to a
88. 3:41new customer segment looking for lowcost
89. 3:44yet well-made cars and cost savings
90. 3:48where equivalent sized Volkswagen and
91. 3:50scoda models eventually share the same
92. 3:53underlying chassis despite looking like
93. 3:55entirely different cars so essentially
94. 3:58the chassis only needs to be developed
95. 4:00once and can be used across both
96. 4:04Brands so let's take a quick look at an
97. 4:06example of vertical integration and
98. 4:08we're going to look at luxury fashion
99. 4:10brand Louis vuon so Louis Von is a
100. 4:13luxury leather goods manufacture and a
101. 4:16critical vertical integration that it
102. 4:18has made is that its products are only
103. 4:21available for sale through its own
104. 4:24retail stores you cannot buy Louis Von
105. 4:27products anywhere else so why why have
106. 4:30they set themselves up in this way why
107. 4:31can't you simply go and buy one of their
108. 4:34bags from Amazon well there's many
109. 4:36reasons for this including selling only
110. 4:39through its stores boosts the
111. 4:41exclusivity of its products and allows
112. 4:44them to charge premium prices it also
113. 4:47allows the brand to provide a luxury
114. 4:50shopping experience to its customers
115. 4:52which again helps it to charge premium
116. 4:55prices and finally vertical integration
117. 4:58provides a consider able barrier to
118. 5:00entry against competitors so if a new
119. 5:03entrant wants to enter the market and
120. 5:05compete directly with Louis VTO having
121. 5:08to set up its own stores is a huge and
122. 5:11costly barrier to entry of course that
123. 5:14company could just sell via Amazon but
124. 5:16that doesn't give it the same cache and
125. 5:19therefore doesn't allow it to sell its
126. 5:21products at a similar price to Louis
127. 5:23vuon so let's take a look at the
128. 5:25advantages and disadvantages of both
129. 5:27horizontal and vertical inte ation but
130. 5:30we'll start with horizontal integration
131. 5:33so in terms of advantages it can lower
132. 5:35your operating costs by reducing the
133. 5:38duplication of resources and increasing
134. 5:41economies upscale it can increase your
135. 5:44differentiation by allowing you to offer
136. 5:46more combinations of products it enables
137. 5:49you to sell to new market segments while
138. 5:52maintaining known and understood
139. 5:55business models your increased size can
140. 5:58give you greater bar bargaining power
141. 6:00with your
142. 6:01suppliers in terms of disadvantages well
143. 6:04all mergers and Acquisitions carry risks
144. 6:07and your union or joining together may
145. 6:09not work out as you hoped secondly
146. 6:12becoming too large may result in
147. 6:15anti-rust issues and finally
148. 6:17implementing a horizontal integration
149. 6:20strategy isn't easy and it will take
150. 6:23time to realize any
151. 6:25benefits so looking at vertical
152. 6:27integration advantages and dis
153. 6:29advantages first in terms of advantages
154. 6:32then you can increase margins and
155. 6:34economies of scale by eliminating
156. 6:37intermediaries and consolidating
157. 6:39staff it allows you more control over
158. 6:42the quality of your product and the
159. 6:44quality of your customer experience
160. 6:46which as we've seen with Louis Von is
161. 6:49very important for luxury Brands it
162. 6:51allows you to differentiate from your
163. 6:53competitors so for example Apple Stores
164. 6:56position Apple products in a different
165. 6:59way to Microsoft products because they
166. 7:01don't have an Associated
167. 7:03store next acquiring suppliers allows
168. 7:06you to protect any proprietary processes
169. 7:09you use at that level in your supply
170. 7:11chain and finally it increases barriers
171. 7:14to entry for new entrance wishing to
172. 7:17compete directly with you in terms of
173. 7:20disadvantages then it can be expensive
174. 7:22to purchase more of your existing supply
175. 7:25chain it can also increase your ongoing
176. 7:28costs so for example purchasing your
177. 7:31manufacturer and having them focus on
178. 7:33producing just for you rather than for
179. 7:36many customers can lead to higher costs
180. 7:39and finally again you know success isn't
181. 7:41guaranteed as with all mergers and
182. 7:43Acquisitions many things can go
183. 7:46wrong so in summary business owners are
184. 7:49always looking for ways to grow their
185. 7:51companies and horizontal and vertical
186. 7:54integration provide two approaches to do
187. 7:57this through mergers and acquisition
188. 8:00horizontal integration occurs when you
189. 8:02acquire another company in the same line
190. 8:05of business whereas vertical integration
191. 8:08occurs when you acquire another company
192. 8:10in your supply chain which approach is
193. 8:13right for you will depend on your
194. 8:14business's unique circumstances and
195. 8:17future goals and
196. 8:18Ambitions so that's it for this lesson I
197. 8:21really hope you enjoyed it and I look
198. 8:23forward to speaking to you again soon