Vertical Integration Horizontal Integration Outsourcing / Offshoring
Nature Expand backward (suppliers) or forward (customers) along the supply chain. Acquiring or merging with competitors. Some activities performed by another corporation or at another location.
Goals Lower costs. Enhance and protect product quality. Improve supply chain efficiency. Economies of scale. Product differentiation. Business model replication. Oligopoly. Reduce costs. Focus on core competencies.
Issues Higher cost structure of suppliers. More difficult to adapt to changes. Different business cultures. Anti-monopolistic responses. Dependency. Loss of competency.
The Corporation and its Expansion
Globalization has favored a variety of expansion strategies for corporations through which many became multinationals. The most common are:
  • Vertical integration. The practice of either expanding backward or forward along the supply chain by acquiring (or merging with) suppliers or customers. This can result in many positive outcomes for a vertically integrated corporation. Costs can be lowered while quality improves with a better control of the production process. Key technologies and practices can also be kept "in-house", a helpful strategy in sectors where innovation is a major competitive advantage. However, the outcome can result in a higher cost structure of suppliers since they are less subject to competitive pressures, which can also result in less flexible supply chains in light of economic or technological changes.
  • Horizontal integration. The practice of acquiring or merging with competitors, which results in better economies of scale and the replication of an efficient business model as the leading firm (acquirer) tends to be more productive. Horizontal integration can also be prone to difficulties, particularly if it takes place across nations with different regulatory environment and business cultures. Higher level of market concentration among a few players may even trigger anti-monopolistic responses by governments.
  • Outsourcing / Offshoring. The practice of having some activities performed by another corporation (outsourcing) or at another location (offshoring). It often enables to reduce costs and focus on core competencies by outsourcing low productivity tasks to a sub-contractor. This may however lead to a dependency on suppliers (particularly if the supplier is in a monopolistic situation) and the loss of competencies that could be difficult to re-internalize if needs be.