Many companies seek growth opportunities through integrating either vertically or horizontally with other companies. Vertical integration is a strategy where companies expand their business into their production chain (backward integration) or distribution path (forward integration), and these are generally achieved by M&A or internal growth. While horizontal integration is when a company acquires or merges with another company on the same level of the value chain, in other words, a competitor.
Companies are naturally looking for opportunities to grow, and often international markets are the solution. Entering a new market and maintaining growth in international markets is extremely difficult, therefore, it is often more effective for a company to take advantage of the established expertise of local companies in new regions and be able to achieve economies of scale. International horizontal and vertical integration has allowed companies to quickly introduce their product or service to a new market and benefit from the existing customer base and/or production facilities.
International horizontal integration’s purpose is generally to provide a win-win situation. We see many professional services firms acquiring firms in regions where a demand for professional services is rising. On one hand, the global firm gains access to more financial and human resources and on the other hand, the local firm gets the brand pull. Zara, a Spanish clothing company, is known for its vertical integration expertise. They supply most of their own clothes and sell them in their 1000 outlets worldwide, unlike H&M and GAP who purchase their clothes from suppliers. This helps the company manage its inventory globally with extreme efficiency and respond to seasonal and other fashion changes within 2-3 weeks while their competitors generally take up to 9 months to introduce a new line of clothing globally.
As you can see there are a variety of benefits to these integrations, but in reality, we often see unsuccessful integrations due to improper handling from management or a simple mismatch of cultures and procedures. Just as any high return investment, many risks are tied into these integrations and they are incredibly costly, however, with the right amount of analysis and planning from management, there is a great deal of potential for growth.