Vertical Integration vs. Horizontal Integration

Per the request of a reader, I’m following up on one of my more popular articles on horizontal and vertical organization in companies to talk about horizontal and vertical integration in an industry. While the previous article was about how business conduct operations, this entry will talk about how they conduct strategy. And yes, I will explain why technical communicators should care (audience first, y’all!).

Someone else’s definition

I’m going to cheat here because I really can’t compete with the clarity of this explanation Investopedia.com. I’ll come back to offer thoughts for the technical communicator at the end:

A horizontal integration consists of companies that acquire a similar company in the same industry, while a vertical integration consists of companies that acquire a company that operates either before or after the acquiring company in the production process.

When a company wishes to grow through a horizontal integration, it is seeking to increase its size, diversify its product or service, achieve economies of scale, reduce competition, or gain access to new customers or markets. To do this, one company acquires another company of similar size and operations, in the same industry. Two great examples of a horizontal integration are the acquisition of Pixar by Disney or the acquisition of Instagram by Facebook.

When a company wishes to grow through a vertical integration, it is seeking to strengthen its supply chain, reduce its production costs, capture upstream or downstream profits, or access downstream distribution channels. To do this, one company acquires another company that is either before or after it in the supply chain process. A great example of a vertical integration is when Verizon and AT&T opened their own retail locations through acquisition.

When it comes to a vertical integration, a company can either integrate forward in a forward integration or backward in a backward integration. A backward integration occurs when a company decides to own another company that makes an input product to the acquiring company’s product. An example of this is if a car manufacturer acquires a tire manufacturing company. A forward integration occurs when a company decides to take control of the post-production process. An example of this is if the same car manufacturer acquires an automotive dealership. The vertical integration examples above with Verizon and AT&T are also forward integrations.

Why should a technical communicator care about this?

It should go without saying that the more you know about the organization you work for, the better you can understand your part in it and make a better contribution. It can be tempting to focus on your own little silo, especially in large conglomerates, but the larger the organization, the more opportunities you have to find work.

Opportunities in a vertically integrated organization

My first encounter with vertical and horizontal organizations was in a high school history class discussion on 19th century capitalism. One of the best examples of vertical organization was Andrew Carnegie‘s U.S. Steel, which attempted to acquire pieces of the steel industry from the raw material end to transportation for the steel (railroads) to actual steel production. The goals were, as the article above indicated, to reduce costs and increase profits up and down the supply chain.

A modern example of vertical integration would Elon Musk’s rocket company SpaceX. The overall goal of SpaceX is to make humanity a multi-planet species. One of the limitations of people moving en masse to the Moon or Mars has been the high cost of space travel. Space travel has been expensive because rockets have been flown like the missiles they were based upon: flown once, then dropped. Because rockets have flown so rarely, the parts have to be super-reliable, the demand for them has been low, and the prices correspondingly high. Building things in-house made sense. And SpaceX isn’t just building reusable rockets, they’re also building spacecraft to send cargo and (soon) people into space. That’s about as “vertical” as you can get.

 

As a technical communicator in a vertically integrated organization, your perspective needs to be process-oriented: seeing how all the moving parts (in the product and the organization) fit together to meet a specific goal. Because there are multiple pieces to a vertical organization (i.e., differing industries combining to make one product), you have the opportunity to learn about the needs and challenges of many different types of business.

Opportunities in a horizontally integrated organization

Going back to that lesson on 19th century history, the prototypical horizontal organization was John D. Rockefeller‘s Standard Oil, which sought relentlessly to control every outlet for oil and gasoline production and sales. Standard Oil was subsequently broken up by President Theodore Roosevelt for being a “trust,” or what we’d today call a monopoly, where one organization or set of organizations attempts to corner the market on one commodity and to fix prices to the detriment of the public.

A modern-day example of a horizontally organized industry is U.S. large commercial aircraft manufacturing, which is dominated by Boeing and few others, as competitors Lockheed (now Lockheed Martin) and Convair (now part of General Dynamics) got out of the business, and Boeing itself bought McDonnell-Douglas. While the only major aircraft manufacturer in the U.S., Boeing’s primary competition is Airbus. Between the two of them, Boeing and Airbus account for 66% of the world market, with the remaining 34% taken up by smaller organizations building smaller aircraft.

If you had a burning desire to work for companies that build big (150 passengers or more) commercial aircraft here in the States or in Europe, you’re going to be working for Boeing or Airbus, the only difference being where you do your work. In the case of horizontal organization, the primary source of diversity is geographical rather than industrial. Mind you, different parts of aircraft might be built in different places, so you can learn about specific parts of the product, but most of the major factories are in Washington, California, and Missouri. (Boeing has interactive maps showing where all their employees are located, state by state, and worldwide.)

The enterprising technical communicator jumping into a horizontally integrated organization has the opportunity to understand the system and how different locations contribute to the overall outcome of a single product/service. (Boeing is also a diverse defense contractor, on the verge of becoming a vertically integrated organization as well, as it acquires more and more pieces of the aerospace-military-industrial complex; however, there it competes with Lockheed Martin, Northrop Grumman, General Dynamics, and others. However, the two biggest of the lot are Boeing and LM.)

The bottom line with vertically and horizontally integrated organizations is that they are pursuing economies of scale to bring as much of some particular activity under one corporate umbrella as possible. This type of diversity–industrial or geographical–offers different opportunities for technical communicators, depending on what type of diversity you seek as you pursue your career.

Of course, large organizations like that also produce a lot of bureaucracy and paperwork, which is how small providers of products and services provide the advantages of nimbler response time, fewer levels of authority/approval, and lower costs. If the big companies aren’t your style, your sources of diversity and opportunity will lie with supporting multiple small companies.

Regardless of your choices, you can safely assume that sitting still in one job in one company will not be a likely option, if only because the company you’re in will be reorganized, acquired, or outcompeted. It’s a busy, dynamic economy out there; how you decide to maneuver through it is your challenge.

About Bart Leahy

Freelance Technical Writer, Science Cheerleader Event & Membership Directior, and an all-around nice guy. Here to help.
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