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The Meaning of Vertical and Horizontal Integration

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Length: 752 words (2.1 double-spaced pages)
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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
EasyJet.

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.

Task 2B

This diagram shows the vertical integration that Thomson used to
expand as an organisation.

Sector

2004 (Year)

2005 (Year)

Airline

Britannia Airways

Thomson Fly

Tour Operator

Thomson

Thomson

Travel Agent

Lunn Poly

Thomson

An example of Horizontal &

Vertical Integration

“The Big 4”

World Of TUI

Thomas Cook

My Travel Group

First Choice

Airline

Thomson Fly

Thomas Cook Airways

My Travel Lite

First Choice Airways

Tour Operator

Thomson

Thomas Cook Holidays

Airtours

First Choice

Travel Agent

Thomson Travel

Thomas Cook Travel

Going Places

First Choice Travel Shops

[IMAGE]

Airline

[IMAGE]


Tour Operator

Travel Agent

Task 2C

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
needs.

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.

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"The Meaning of Vertical and Horizontal Integration." 123HelpMe.com. 25 Oct 2014
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