Horizontal & vertical integration

Written by michael ryan
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Horizontal & vertical integration
Horizontal and vertical integration helped to spur the Industrial Revolution. (factory image by e1129783 from Fotolia.com)

Horizontal integration and vertical integration are corporate strategies that allow a company to grow in such a way that efficiency and profitability are increased throughout the company. These strategies, which are not mutually exclusive, were essential to the formation of America’s first major corporations during the late 19th century and they continue to be important concepts for expanding corporations.

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History

While you may know that the Industrial Revolution relied on technological advances, like the steam engine and railroads, new ways of managing companies were equally important. According to Digital History, “As businesses grew larger, new bureaucratic hierarchies were necessary. A business' success increasingly depended on central coordination.” These new methods were pioneered by industrial magnates such as John D. Rockefeller, who used both to make Standard Oil into a powerful monopoly.

Horizontal & vertical integration
Standard Oil used vertical and horizontal integration to dominate the American oil industry. (oil refinery 6 image by Aaron Kohr from Fotolia.com)

Vertical Integration Features

Vertical integration is the process of taking over your industry's entire supply chain. Rockefeller’s Standard Oil was vertically integrated because it drilled for oil, refined crude oil into usable products and then transported those products to retail outlets. Vertically integrated companies can minimise their own costs while being able to effect competitors’ costs. Rockefeller was known to manipulate crude oil prices to drive refineries to bankruptcy, allowing him to buy them cheaply. His Standard Oil eventually controlled 84 per cent of the U.S.oil market.

Horizontal Integration Features

In horizontal integration, a business offers a wide variety of closely related products and services. Andrew Carnegie’s US Steel is the classic example of horizontal integration. According to Digital History, “In the 1850s, an iron furnace might produce a single product such as cast iron or nails. But U.S. Steel produced a vast array of metal goods.”

Horizontal & vertical integration
US Steel produced a wide variety of products instead of specialising in just a few. (forge business image by Sergey Goruppa from Fotolia.com)

Theories/Speculation

These new corporate strategies developed at the same time that the idea of Social Darwinism was taking hold. Social Darwinism held that the most successful people and strongest companies should dominate so that society would continue to improve. Inspired by Charles Darwin’s notion of survival of the fittest, which he expounded as part of his celebrated theory of evolution, this philosophy was often cited during the years of early industrialisation to justify the vast disparities in wealth that existed and to argue against intervention by the government in the economy.

Horizontal & vertical integration
Social Darwinists saw economic competition as a way to promote overall societal good. (Business competition image by Christophe Schmid from Fotolia.com)

Prevention/Solution

But people who were on the losing end of vertical and horizontal integration believed that such arrangements endangered fair markets. According to West’s Encyclopedia of American Law, “Antitrust law originated in reaction to a public outcry over trusts, which were late-nineteenth-century corporate monopolies that dominated U.S. manufacturing and mining.” The 1890 Sherman Antitrust Law allowed the courts to break up companies that were determined to be monopolies in an effort to promote competition.

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