The Meaning of Vertical and Horizontal Integration
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The Meaning of Vertical and Horizontal Integration
Horizontal integration is where an organisation owns two or more
companies, on the same level of the buying chain. An example of this
is the First Choice Group; they own First Choice Travel Agency and
First Choice Hypermarket, both of which are on the same level of the
buying chain. The advantage of horizontal integration is that it can
increase the company’s market share. Another good example of this type
of integration is when EasyJet purchased the airline Go from British
Airways. Now EasyJet and Go both operate under the company name of
Vertical integration is when an organisation own companies on two or
more levels of the buying chain. Examples of this can be found within
“The Big 4,” all of them own an airline, travel agent and a tour
operator. The companies have until recently used different names for
their travel agency, airlines and tour operators, but now they are
power branding their companies so that customers can see whom they are
booking with. An example of this is TUI UK, which has rebranded its
companies using the Thomson name.
This diagram shows the vertical integration that Thomson used to
expand as an organisation.
An example of Horizontal &
“The Big 4”
World Of TUI
My Travel Group
Thomas Cook Airways
My Travel Lite
First Choice Airways
Thomas Cook Holidays
Thomas Cook Travel
First Choice Travel Shops
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Integration Vertical Integration Travel Agency Market Share Thomson Easyjet Cook Tour Booking Diagram
Using the information you have presented for Task 2A & 2B, and explain
the effects of integration on the structure of the travel and tourism
industry in general.
The structure of the industry has changed due to the amount of
integration. Integration has a positive and negative impact on the
industry. Vertical integration is when an organisation wishes to buy
another organisation on a different level of the buying chain. An
example of this is shown above, Thomson brought the airline, Britannia
Airways and also Lunn Poly, a travel agent. This shows how Thomson has
been vertically integrated. As Thomson brought Britannia Airways it
has allowed them to offer customers lower fares. This means that the
tour operator is making more profit. The same is not true for travel
agents, they are paid a low rate of commission, and therefore most of
profit will go to the tour operator. Integration is good as it allows
the organisation to control their pricing and communicate well with
companies on all levels of the chain.
Horizontal integration is when an organisation buys another
organisation on the same level of the buying chain. A good example of
this, when “Go” a budget airline owned by British Airways was taken
over by EasyJet in 2002. When the companies merged EasyJet “power
branded” this means that all of the logos and names that Go had used
previously where replaced by the EasyJet name and logo. This had a
negative impact on customers, EasyJet has more market control, and
this allows them to dictate what the prices can be. The positive side
of this integration is that EasyJet now has more customers flying with
them and therefore can have more market space to promote themselves.
Tour operators have an advantage over travel agents has they have a
bigger market share. When a tour operator is integrated with a travel
agent, the travel agent will sell the products and services of tour
operator. The tour operator has control on the amount of the
commission that the travel agents will receive. If the travel agent
doesn’t wish to accept the offer, they may lose a lot of business, as
they are not selling as many products, to cater for the customers
Independent travel agents are being seriously affected by integration,
big companies such as First Choice, are controlling the amount of
commission travel agents receive. They are also losing commission as
tour operators and airlines are selling their products and services
direct on the Internet. Older customers still prefer to use high
street travel agents as they may not know how to use the Internet or
would like the reassurance of booking in person. Travel agents are
having to change to meet the needs of the customer, and are turning to
the ‘niche’ market to make commission.
Airlines have also been affected by integration, British Airways
wanted to merge with American Airlines, but IATA declined their
proposal, as they would be able to dominate the pricing of
transatlantic flights from the UK.
Horizontal and vertical integration has reduced competition within the
industry, as more organisations are buying each other out to expand
due to the demand that is being received from the public for their
products and services. Companies that are integrating are able to set
the price, and smaller companies such as Collette Worldwide Holidays,
will be unable to compete. The risk that larger companies take when
integrating, is small compared to independent organisations. Larger
organisations, such as Travelcare make a bigger profit and therefore
it will not affect the organisation, if the merge doesn’t work.
Smaller companies like Southall Travel may have their business ruined
if it doesn’t work.
Vertical integration is the merging together of two businesses that are at different stages of production—for example, a food manufacturer and a chain of supermarkets. Merging in this way with something further on in the production process (and thus closer to the final consumer) is known as forward integration.
Vertical integration can be contrasted to horizontal integration, the merging together of businesses that are at the same stage of production, such as two supermarkets, or two food manufacturers. Merging with something further back in the process (if a food manufacturer were to merge with a farm, say) is known as backward integration. The integration of two organisations that are in completely different lines of business is sometimes referred to as conglomerate integration.
Businesses are downstream or upstream of each other depending on whether they are nearer to or further away from the final consumer (the “sea”, as it were, to which the river of production flows).
The benefits of vertical integration come from the greater capacity it gives organisations to control access to inputs (and to control the cost, quality and delivery times of those inputs). In line with the changing organisational structure of the late 20th century, however, this logic became less compelling. In the late 1990s, consultants McKinsey & Company wrote:
Whereas historically firms have vertically integrated in order to control access to scarce physical resources, modern firms are internally and externally disaggregated, participating in a variety of alliances and joint ventures and outsourcing even those activities normally regarded as core.
Some of the best known examples of vertical integration have been in the oil industry. In the 1970s and 1980s, many companies that were primarily engaged in exploration and the extraction of crude petroleum decided to acquire downstream refineries and distribution networks. Companies such as Shell and BP came to control every step involved in bringing a drop of oil from its North Sea or Alaskan origins to a vehicle's fuel tank.
The idea of vertical integration was taken a step further by Dell Computer, one of the most successful companies of the 1990s. Michael Dell, its founder, said that he combined the traditional vertical integration of the supply chain with the special characteristics of the virtual organisation to create something that he called “virtual integration”. Dell assembles computers from other firms' parts, but it has relationships with those firms that are more binding than the traditional links between buyer and supplier. It does not own them in the way of the vertically integrated firm, but through exchanges of information and a variety of loose associations it achieves much the same aim—what Michael Dell calls “a tightly co-ordinated supply chain”.
Vertical integration is a difficult strategy for companies to implement successfully. It is often expensive and hard to reverse. Upstream producers frequently integrate with downstream distributors to secure a market for their output. This is fine when times are good. But many firms have found themselves cutting prices sharply to their downstream distributors when demand has fallen just so they can maintain targeted levels of plant utilisation.
The vertically integrated giants of the computer industry, firms such as IBM, Digital and Burroughs, were felled like young saplings when at the end of the 1970s Apple formed a network of independent specialists that produced machines far more efficiently than the do-it-all giants.
Dell, M., Magretta, J. and Rollins, K., “The power of virtual integration: an interview with Dell Computer's Michael Dell”, Harvard Business Review, March–April 1998
Harrigan, K.R., “Vertical Integration, Outsourcing and Corporate Strategy”, Beard Books, 2003
Stuckey, J. and White, D., “When and When Not to Vertically Integrate”, McKinsey Quarterly, No. 3, 1993
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