One of the biggest examples of horizontal integration is Facebook’s acquisition of Instagram in 2012 for about $1 billion.
By Vidya Hattangadi
Business integration is a strategy used to synchronise IT to achieve immediate goals and objectives aligning with business culture. It reflects how IT is being riveted as a function of business. Business integration helps growth of companies; any company which wants to grow needs healthy practices in terms of adding new vibrant functions. IT plays a fundamental role in automating complex problems by introducing user-friendly solutions. There are two types of integration.
Horizontal integration: When a company wishes to grow through a horizontal integration, it looks out to acquire similar companies in the same industry. The acquisition or merger helps the main acquiring company to increase its size, diversify its product offerings or services, achieve economies of scale, help in gaining access in a new market, and of course reduce competition. One of the biggest examples of horizontal integration is Facebook’s acquisition of Instagram in 2012 for about $1 billion. Both Facebook and Instagram work in the same sector of social media and were in similar business such as photo-sharing services. Facebook was looking to strengthen its position in the social sharing space; it saw the acquisition of Instagram as a brilliant opportunity to grow its market share by accessing new audiences resulting in synergies.
Another horizontal integration is example is Tata Steel’s acquisition of Corus, which made Tata Steel a new steel giant. The acquisition helped Tata Steel to tap European mature market; and the cost of acquisition was lower than setting up of greenfield plant and marketing and distribution channel. Tata manufactures low-value, long and flat steel products while Corus produces high-value stripped products.
Vertical Integration: Vertical integration is a business strategy used to expand a firm by gaining ownership of a company that operates in the production process of the same industry. It can be a supplier, a distributor, packaging firm. Through a vertical integration a company tries to strengthen its supply chain, reduce production costs, and also access new distribution channels.
Vertical integration is of two kinds.
Forward integration is a business strategy that involves a form of vertical integration whereby business activities are expanded to include control of the direct distribution of a company’s products. This type of vertical integration is conducted by a company moving down the supply chain. A good example is Amazon buying the Whole Foods Market organic grocery chain at $42 per share, or a total of $13.7 billion. With this acquisition Amazon gained its investment in brick & mortars retail and laid its hands on a large data of customers’ grocery buying habits and patterns and preferences. It helped Amazon correlate purchases of different products and different categories in making grand strategies.
Backward Integration is a strategy in which a company acquires supplier of its raw materials, or sets up its own facilities to ensure a more reliable or cost-effective supply of inputs. Example of backward integration is in 2014, the Ferrero Group, one of the market leaders of the chocolate confectionery industry acquired Otlan group for $500 million. Otlan is the global leader for supplying hazelnuts.
By acquiring Otlan, Ferrero improved quality of its product the hazelnut chocolate that gives a unique taste to many of its popular products, such as Nutella, Ferrero Rocher and Kinder Bueno. Another example of backward integration is Ikea furniture buying an entire Romanian forest to help to secure its timber supplies. The purchase of the 83,000-acre woodland in north-eastern Romania is the first time that a furniture company will manage its own forest operations. It is thought to have cost €100 million. Ikea said the deal would allow it to manage wood sustainably at affordable prices. Romanian government welcomed the Ikea deal but conservationists are concerned that it may pave the way for encroachment into areas such as the foothills of the Carpathian Mountains.
IT has become a vital and integral part of every business integration strategy because of the multiple usages. In numerous companies, email is the principal means of communication. Inventory is managed by IT to track the quantity of each item, triggering an order of additional stock when the quantities fall below a pre-determined amount. Today, most companies store digital versions of documents on servers and storage devices. These documents become instantly available to everyone in the company, regardless of their geographical location.
Progressive companies use that data as part of their strategic planning process as well as the planned execution of that strategy. IT enables companies to track sales data, expenses and productivity levels. Even in customer relationship management. It helps capture every interaction a company has with a customer, so that a more enriching experience is possible.