Horizontal And Vertical Integration: Made Easy

Horizontal and vertical integration are important concepts in all businesses, including those operating in the tourism industry.

An important management strategy, horizontal and vertical integration allows companies to be more competitive in the marketplace. But how does this actually work?

In this article I will teach you what horizontal and vertical integration is, discussing the advantages and disadvantages of both. I will also explain why such integration has happened/is happening and I will give you some examples of horizontal and vertical integration.

Contents

What is horizontal integration?

Horizontal integration is a competitive strategy that companies use. It refers to the acquisition of business activities that are at the same level of the chain of distribution in similar or different industries.

To put it simply, horizontal integration is when a related business merges with another business operating in the same level of the production chain. For example, a ski-based tour operator may merge with a tour operator which specialises in summer sun holidays.

These are different organisations, which operate at the same level.

There are many reasons that a company in the tourism industry may choose to integrate horizontally, such as:

When the industry is growing
When merges allows better value for money to be achieved
When competitors lack expertise
When the company can manage the operations of the bigger organisation efficiently, after the integration

Advantages of horizontal integration

Horizontal integration can be advantageous because it can enable economies of scale to be achieved (i.e. they can get better value for money). The bigger, horizontally integrated company can often achieve a higher production than the companies merged, at a lower cost.

Mergers help to provide organisations with increased power in the marketplace, whilst enabling the organisation with the opportunity to capture new markets. The company becomes larger, has a bigger marketshare and has less competition.

Horizontal integration can also allow organisations to penetrate new markets in different geographical areas. This is particularly relevant in travel and tourism, where operations occur around the globe.

Disadvantages of horizontal integration

Whilst there are benefits of horizontal integration, however, there are also disadvantages.

Organisations often encounter problems when they grow. Allowances need to be put in place for restructures and recruitment of new staff where appropriate.

There are also legal implication when merging companies. These differ in different countries. It is important that the organisation looks into any legal requirements that will be expected of them.

The decision whether to adopt vertical or horizontal integration has a long-term effect on the business strategy of a company and therefore the decision to do so must not be taken lightly.

Horizontal integration in tourism examples

Travelopia is a great example of a tourism organisation with lots of horizontal integration.

Travelopia is the world’s largest collection of specialist travel brands. This means that the organisation can offer a variety of products, which are at the same level in chain of distribution. So, whilst Aus Travel and American Holidays may be totally different companies, they are both at the same level (tour operators) under the Travelopia umbrella.

Another good example of horizontal integration in travel and tourism is the Virgin Group.

The Virgin Group have owned many different companies throughout the years and some have been more successful than others.

A good example of horizontal integration within Virgin Atlantic is their airlines based in different parts of the world. Virgin Atlantic is based in the UK, Virgin Australia is based in Australia and Virgin America (which ceased to continue after 2018) was based in the USA. All of these companies are/were at the same level of the distribution chain, but are/were different companies.

You can learn more about the Virgin brand here.

What is vertical integration?

Vertical integration is the opposite of horizontal integration.

Vertical integration is a competitive strategy identified when a company takes over one or more other companies that are at different levels in the chain of distribution.

Many companies choose to opt for integration to allow for total control of all aspects of their business. This may include the manufacturing of their products right through to sales, for example.

Advantages of vertical integration

There are several benefits of vertical integration in travel and tourism.

By maintaining control of the supply chain, organisations have greater control. They can regulate and manage all aspects.

For example, Tui holidays puts together their holidays via their tour operations and then sells them via their travel agents. They then put tourists on aircraft that are owned by TUI and tourists are greeted in their destination by TUI representatives- this demonstrates a smooth and consistent process throughout, where all aspects are owned and managed by TUI.

Vertical integration allows more scope for the highs and lows of business and enables the organisation to diversify their income. If one part of the business isn’t doing so well, there is the hope that the other areas of the business can compensate for this or to help absorb the loss. Likewise, if one area is doing particularly well, the money made from this can be invested in any areas of the business that require investment.

Vertical integration can also increase barriers for new entrants and help to reduce competition.

Disadvantages of vertical integration

There are also some downsides of vertical integration.

Less competition means that prices may rise for consumers and that standards may drop.

The organisation may also have less flexibility as they must maintain a level of production in order to continue operations.

It can also be difficult for an organisation to be good at everything. Sometimes an organisation can do one thing particularly well, but then other areas may not have the same high standards (i.e. they may be great at making delicious sandwiches but not so great at offering customer service at the dining table).

Vertical integration in tourism examples

TUI is one of the biggest travel companies in the world. Since the collapse of Thomas Cook, TUI has a monopoly of tour operator operations within the United Kingdom and other parts of the world.

You can learn more about the organisation TUI and its different branches here.

Within the umbrella organisation, TUI owns many different companies. Some are at the same level (horizontal integration) and other are at different levels (vertical integration).

As I described earlier, TUI has many companies that are at different levels of the chain of distribution. This includes their tour operations, travel agents, airline and in-destination services.

Disney is another organisation that has a history of both horizontal and vertical integration. You can learn all about this in the video below.

Why has horizontal and vertical integration happened?

Horizontal and vertical integration has happened throughout all sorts of business around the world, including travel and tourism.

One reason for this is because the suppliers who work with companies or the distributors who work with the end product are unreliable. Therefore some organisations see it as easier to simply do these things themselves.

Money is also an important factor. Working with outside companies can often be more costly than doing it yourself. Suppliers and distributors may have big profit margins and this is money than can be saved of organisations take over these operations themselves.

Some companies simply have enough resource for horizontal and vertical integration to occur so… why not?

And lastly, when a specific industry grows considerably, as the travel industry did for many years prior to COVID-19, then there is more scope for organisations to expand through horizontal and vertical integration.

Horizontal and vertical integration: To conclude

As you can see, horizontal and vertical integration is a competition strategy often used in business. Whether a company seeks to merge with other companies at the same (horizontal) level or at different (vertical) levels, there are many advantages both to the consumer and to the organisation itself. There are, however, also some disadvantages that need to be managed also.

Horizontal and vertical integration: Made easy