In 1901, Andrew Carnegie became one of the richest men in the world when he sold Carnegie Steel for $480 million—equivalent to nearly $18 billion today. How did Carnegie Steel become so valuable? In part, because the company used a vertical integration strategy. Over the course of 26 years, Carnegie acquired sourcing, production, and distribution channels from mines to railroads, ultimately allowing his businesses to sell its products at lower prices than competitors.
The Carnegie Steel story is an epic one, but you don’t need to be a ruthless robber baron to leverage integration strategies for your business. Learn the two types of integration strategies and how you can use them in your ecommerce business.
What is an integration strategy?
An integration strategy is a process that businesses use to expand into new areas of operations or acquire competitors. Integration strategies can improve your competitive advantage, operational efficiency, market share, or a combination of the three. There are two types of integration strategies: vertical and horizontal.
Businesses use integration strategies to achieve a variety of goals—like increased quality control, more efficient delivery to customers, or expansion into new markets.
How a vertical integration strategy works
In a vertical integration strategy, your business assumes increased control over the sourcing, manufacturing, or distribution of its products. This gives you a greater degree of control over the costs associated with production and distribution—allowing you to lower prices. You might also use a vertical integration strategy to increase quality assurance for your products.
There are three main ways a business can pursue a vertical integration strategy:
1. Backward integration
With backward integration, your business extends control over its supply chain by integrating with raw material suppliers or manufacturing goods yourself. For example, if your online candle company purchases a small warehouse space and begins producing candles in-house, this would qualify as backward integration.
2. Forward integration
You can use forward integration to gain control over activities further down the supply chain, like owning the distribution channels of your product, operating a delivery service, or handling post-purchase relationships by acquiring a customer service company. For example, if your t-shirt business sells products through third-party boutiques, you could use forward integration to switch to a direct-to-consumer (DTC) model by launching your own ecommerce website.
3. Balanced integration
Balanced integration is exactly how it sounds—a little bit backward and a little bit forward. A company that extends control over its supply chain and distribution channels is practicing balanced integration. For example, your coffee retail business can implement balanced integration by roasting its beans in-house and selling direct-to-consumer monthly subscription boxes.
Advantages and disadvantages of vertical integration
There are benefits and drawbacks to adopting either vertical and horizontal integration strategies, but keep in mind that you don’t need to fully commit to one strategy—you can always use elements of both.
Advantages
- Cost savings. Backward integration allows your business to scale its control over materials and production processes, potentially lowering costs by reducing reliance on third-party vendors with higher markups.
- Expanded control. Backwards integration can also increase your influence over the quality of your products. Forward integration removes reliance on third-party distributors, allowing you to control how your products are marketed, sold, and delivered to customers. This also increases control over the customer experience.
- Protection against disruption. By exercising more control over both forward and backward operations, a company can protect itself against disruptions in the supply chain or distributor operations.
Disadvantages
- Strained resources. By diverting resources to ongoing backward or forward operations, team members may have difficulty completing some core business functions.
- More overhead. To take over manufacturing or distribution operations, you’ll likely need more physical spaces like warehouses or production floors, and expanded business processes like additional employees and increased training.
- Changes in product and distribution quality. Your vertically integrated business may struggle at first to make products of the same quality as third-party manufacturers or distribute products with the same level of efficiency as third-party distributors. As you assume control over these operations, know that the learning curve might be steep.
How a horizontal integration strategy works
Horizontal integration often has two main objectives: increase market share and expand into new markets. To these ends, businesses often implement horizontal integration by merging with, taking over, or acquiring competitors. You might do this by buying out a competitor in your own market or by acquiring a similar company elsewhere, thereby accessing a new geographic market.
For example, let’s say you operate an ecommerce company in Houston, Texas, that sells locally sourced meal-prep boxes. You’re interested in expanding into Austin. If you have the funds, you can horizontally integrate by acquiring a meal prep business in Austin that already has an extensive local client base, giving you access to your new market quicker than you could if you set up shop from scratch.
Advantages and disadvantages of horizontal integration
Horizontal integration can provide a host of benefits for your ecommerce business, but there are still a few drawbacks to keep in mind.
Advantages
- Increased market share. By horizontally integrating one or more competitors, you can access new customer bases and grow your business’s market share.
- Access to new markets. Expanding your business into new markets can be tricky—think of the time and dedication it takes to develop a singular customer base. Horizontal integration gives you immediate access to consumers outside of your current market, whether those new customers are in different geographic areas or are dedicated buyers of a new type of product.
- Higher priority in the supply chain. When your company takes a greater share of the market, both suppliers and distributors are incentivized to be more responsive to your business needs.
- More resources. Acquiring or merging with a competitor can mean access to more warehousing and production space, employee expertise, ideas, support, and supply chain partners—as well as customer data from your new market.
Disadvantages
- More responsibility. By acquiring a competitor, you take on more responsibilities like maintaining acquired spaces, reconciling new and old inventory, and managing new employees.
- Decreases flexibility. Expanding your business (and perhaps even achieving an economy of scale, the cost advantage of increasing production) can limit your ability to act quickly when faced with new challenges, since you’ll have more employees, partners, and overhead.
- Personnel and system integration challenges. Horizontal integration can be a challenge if new business software, recordkeeping, and data security don’t integrate properly with existing systems. A poorly handled integration process could result in an inefficient data flow that creates data silos, or fragmented business intelligence. Likewise, new staff may not immediately fit within new integrated systems, and there might be redundancies, layoffs, and decreased morale on both sides.
- Increased regulation. Excessive horizontal integration can result in oligopolies or monopolies that reduce market choices and present the opportunity for price gouging. This may draw scrutiny from regulatory agencies that protect consumers by enforcing antitrust laws.
Integration strategy for business growth FAQ
How do you build an integration strategy?
How you build an effective integration strategy will depend on the type of integration you’re pursuing: vertical or horizontal. In either context, it’s essential to research relevant integration solutions and integration technologies—processes and software that help you connect your existing business operations with the ones you acquire.
What is the best type of integration strategy for ecommerce?
There is no single best type of integration strategy for ecommerce. The best type of integration initiative (horizontal or vertical) will depend on your business objectives, position in the market, and the cost feasibility of expanding operations or acquiring a competitor.
What is an example of horizontal integration strategy?
Let’s say you own and manage a successful online women’s shoe store. An example of a horizontal integration strategy would be acquiring a chain of brick-and-mortar shoe stores that sell the same lines of shoes. This would increase your market share and give you access to the in-person shoe-shopping market.
