- Fantastic Team
- 3min read
- Published: October 20, 2021
- Views: 714
What is horizontal and vertical integration in franchising?
Franchises, by their very nature, are a very specific type of business that provide products or services to the end customer through standardised policies and practices across the entire franchising network. This creates continuity in the offering and offers a sense of reliability and predictability in the service offering. However, for service based franchises for example, it’s possible for a franchisor to acquire a similar business to their own in order to grow or to acquire businesses in the product or service value chain with the aim of minimising costs. In short, this is known as horizontal and vertical integration. So, if you’re ready to find out more about horizontal and vertical integration in the space of franchising, you’ve come to the right place.
Also known as mergers or acquisitions, horizontal integration essentially involves the purchase by a franchise of another business that’s similar in nature to it. This can be for growth and expansion purposes, to reduce competition as well as to boost the franchise’s customer base. Therefore, a horizontal integration strategy is one that sees a franchise purchase a business of a similar nature in order to grow.
Vertical integration, on the other hand, is another type of growth strategy that sees a franchise purchasing other businesses in its value chain. The purpose of this is to streamline operations and reduce operating costs. In essence, a vertical integration strategy helps boost profits and gives a franchise the opportunity to gain a wider foothold in terms of customers.
There are two main types of vertical integration:
- Backward integration: backward integration refers to the situation when a company purchases another company that makes an input product for the parent company’s product.
- Forward integration: forward integration takes place when a company decides to take control of the post-production process. This entails acquiring a business ahead of the parent business’ own supply chain.
Benefits of horizontal integration
Some of the benefits of horizontal integration include:
- Increased market share: when a parent company purchases another company of a similar nature, market share is effectively increased.
- Larger consumer base: the expansion of a company then means the exposure to a much wider customer base.
- Increased revenue: the results of a wider customer base essentially translate into more revenue.
- Reduced competition: because of the almost monopolistic style of this type of integration, there is less market competition between two companies that would have essentially competed against each other if the horizontal purchase was not made.
- Synergistic efforts: there is also the benefit of combined marketing efforts and the consolidation of technology, apart from other areas in which the two businesses can now collaborate.
- Reduce production costs: another benefit includes the fact that there can now be reduced production costs due to the fact that both companies can take advantage of a single production facility rather than two separate ones.
Benefits of vertical integration
There are also several benefits of vertical integration and these include:
- Increase sales: when a company purchases another company in its value chain, this can result in better sales figures.
- Reduce costs: the company can also enjoy reduced costs across various parts of the production process as it is now streamlined.
- Ensure tighter quality control: quality control can be improved as there’s better oversight over the production process.
- Better flow and control of information: the entire supply chain can benefit from the improved flow of information as communication about products in demand, manufacturing processes and more can be improved.
- Better control over production volume: production volume can benefit from improved control as the parent company or the main purchaser of the secondary business in the value chain can improve its own processes to align with the production processes.
Horizontal vs vertical integration
Now that you’re aware of what horizontal and vertical integration are, let’s take a look at some of the differences between vertical and horizontal integration. While horizontal integration essentially moves horizontally into the market, expanding through either a merger or an acquisition of another similar business, vertical integration does not do this. There is not lateral movement but rather an upwards or downwards acquisition process along the same company’s value chain.
Choosing the best integration for your franchise model
Franchisors can take advantage of either horizontal or vertical integration, depending on their needs, and sometimes even engage in both in order to secure a wider market share, gain more customers and earn more revenue. While there are differences between the two types of integration, they both involve an element of growth as well as the streamlining of operations. If you’re considering either form of integration, it’s crucial to do your research beforehand to ensure that all complexities are ironed out before the integration takes place and to ensure a smoother process that will ultimately lead to growth
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- Last update: November 5, 2021
Posted in Advice Hub
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