Vertical and Horizontal Integration Theory in the Tourism Industry

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In order to achieve these goals, tourism and hospitality industry choose to integrate both vertically and horizontally to meet the needs of their customers and achieve overall objectives. It should be mentioned that integration is development beyond the present product and market, but still within the broad confines of the ‘industry’ within which the company operates: for example, Sheraton and Crowne Plaza are diversified corporations, but virtually all their interests are in the consumer service industry. Integration both vertical and horizontal therefore builds on the assets or activities which the firm has developed in service or market terms (Nebel, 1991).
1.1. Vertical integration. Vertical integration is a broader term used to describe either backward or forward integration. Backward integration is popular in the tourism and hospitality industry. It refers to development into activities which are concerned with the inputs into the company’s current business (i.e. are further back in the value system). Backward integration is important for tourism and hospitality industry because it refers to development into activities which are concerned with a company’s outputs (i.e. are further forward in the value system), such as transport, distribution, repairs and servicing (Powers, Barrows, 2002).
1.2. Horizontal integration. Horizontal integration refers to development into activities which are competitive with, or directly complementary to, a company’s present activities. A lending library’s extension into tourist information or video cassette material would be an example (Stutts, 2001). The acquisition of, or a merger with, a competitor would be one way of achieving this, for example. The strategic logic behind horizontal development is typically to gain leverage or market power over suppliers or buyers. Higher volume generally confers greater scale economies in purchasing whereas larger product market share confers greater pricing power over customers.
2. The role of vertical integration in the hospitality and tourism industry
Backward vertical development is a movement towards a supplier of resources used by the business. This might be an attempt to secure the supply of a key resource or to gain a cost advantage over competitors by ‘locking in’ a supplier. Conversely, forward vertical development is growth towards the next stage in the supply chain by gaining interest in a buyer of the company’s outputs. In both cases, the strategic logic is to secure a foothold in the same supply chain to guarantee supply or distribution. This degree of vertical integration was unusual in an industry which had become characterized by specialist companies concentrating on just one of these roles. The company believed the strength of its philosophy was that one division could help out another when times got hard, as in the recession of the early 1990s. For example, although demand for low rate hotels had declined, standard services had experienced strong. As a result, the low rate hotels had been turned into standard rate hotels and kept also busy. But the real advantage of vertical integration was exercised when the divisions agreed to improve the of low rate hotels into a standard form.