What is horizontal integration?
Horizontal integration involves acquiring a firm in the same industry that produces or provides similar goods or services. Contrary to vertical integration, corporations grow into upstream or downstream operations at different manufacturing stages.
Understanding Horizontal Integration
Horizontal integration is a competitive approach that can boost economies of scale, market strength, product differentiation, and market expansion. Two firms may generate more money by combining.
Although horizontal mergers can succeed, they harm consumers by reducing competition. For this reason, authorities closely examine horizontal mergers for antitrust violations.
The actual reason for many horizontal mergers is to limit competition from new entrants, established rivals, or organizations offering replacement or alternative goods.
Porter’s Five Factors Model identifies three competitive factors that shape every sector. Supplier and customer power promotes vertical integration.1
Types of Horizontal Integration
Mergers, acquisitions, and internal expansions are horizontal integration methods.
Merger
Mergers generate a new company. Both firms share operations and people, although one generally retains the brand. Additionally, both firms have similar and competing product lines on the market.
In a merger, both firms want to expand into their respective markets. In most mergers, the two businesses’ past activities are comparable, making integration easy.
Acquisition
Like a merger, an acquisition involves one firm taking over another’s activities. Although the corporations merge, one retains control. The acquiring company’s workforce, executives, and operations frequently stay while management integrates the acquired company’s resources.
Companies acquire to gain something specific. Microsoft intended to grow its video game market share. Thus, it bought Activision Blizzard in January 2022.2. This acquisition illustrates a company’s determined approach to a particular area and aim.
Internal Growth
More deliberate internal capital allocation can help companies horizontally integrate. Companies intentionally alter course and deploy additional resources differently through internal expansion. A restaurant may offer catering or a beverage factory may create meals.
In these cases, a corporation operates as before. Instead of investing in external acquisitions or mergers, the company trains workers, purchases equipment, invests in capital, and establishes a new area of operations internally.
2021 saw a booming M&A market. McKinsey said that more extensive acquisitions (above $25 million) reached $5.9 trillion, up 37% from 2020.
Horizontal Integration: Pros and Cons
Advantages
Companies use horizontal integration to gain synergies. Potential economies of scale or cost synergies exist in marketing, R&D, production, and distribution. Economies of scale may make simultaneous product manufacturing cheaper than individual product manufacturing.
Procter & Gamble’s 2005 acquisition of Gillette was a horizontal merger that achieved scope efficiencies. 4 Because both firms made hundreds of hygiene goods, including razors and toothpaste, the merger cut marketing and product development expenditures per product.
Combining products or markets creates synergies. Marketing typically drives horizontal integration. Offering diverse products can enhance cross-selling possibilities and market share for businesses. A clothing retailer may add accessories or combine them with a comparable firm in another nation to avoid building a distribution network.
Disadvantages
Like any merger, horizontal integration may not provide projected synergies and value. Suppose the more prominent firm becomes too bulky and rigid to operate, or the combined businesses have challenges due to dramatically different leadership styles and corporate cultures. In that case, it might even result in negative synergies that lower business value.
We also have regulatory difficulties. When horizontal mergers in the same industry concentrate market share among a few businesses, it forms an oligopoly. A monopoly occurs when one corporation dominates the market. The Federal Trade Commission may investigate mergers that endanger rivals or limit consumer options.
Horizontal Integration
Advantages
- It may provide new efficiencies, economies of scale, or synergies.
- Diversifying products and markets reduces firm risk.
- New cross-selling opportunities may boost profits.
- May reduce expenses owing to better processes and knowledge.
Disadvantages
- It may impair value or synergy if the merger fails.
- This may reveal inflexibilities the merger won’t fix.
- With several leadership teams, management styles may collide.
- Dominant market shares may cause regulatory concerns.
Horizontal vs. vertical integration
Companies extend their businesses through horizontal and vertical integration. Each step seeks a distinct strategic goal. Horizontal integration happens when a corporation wants to stay in its supplier chain. The corporation typically aims to improve its product or increase market share.
Vertical integration involves growing across the supply chain to improve processes the firm is not involved in. A manufacturer may purchase a raw material distributor to gain control over the quantity, price, and timeliness of raw commodities. Backward vertical integration is expanding the company’s manufacturing position.
Vertical integration improves control over a protracted process, whereas horizontal integration helps a corporation specialize. Horizontal integration brings together comparable firms, whereas vertical integration brings together organizations with similar products.
Vertical integration aims to gain independence from suppliers and manage more supply chain factors. Horizontal integration aims to remove rivals, expand the market, and produce economies of scale.
Examples
Horizontal integration is expected in newsworthy mergers. Horizontal integration occurs when companies in related industries merge with or acquire each other. Some examples are:
- JetBlue-Spirit Airlines merger in 2022
- Marriott bought Starwood Hotels and Resorts in 2016.
- The 2016 Anheuser-Busch InBev-SABMiller merger
- Biotech AstraZeneca’s 2015 acquisition of ZS Pharma
- Volkswagen bought Porsche in 2012.
- Facebook’s (now Meta’s) 2012 Instagram purchase
- Disney bought Pixar in 2006.
- Mittal Steel bought Arcelor in 2006.
How Are Horizontal and Vertical Integration Different?
Horizontal integration involves buying firms with comparable supply chains. A manufacturer may buy a rival to improve its process, labor force, and equipment.
Vertical integration is when a corporation buys another company outside its supply chain. A manufacturer may buy a retail firm to control both production and sales.
What is the main benefit of horizontal integration?
Horizontal integration’s key benefit is strategically entering a supply chain segment. The horizontal integration helps a corporation buy a rival, obtain market intelligence, extend its product range, or produce economies of scale. Horizontal integration helps a corporation improve its existing operations.
Why does horizontal integration matter?
Horizontal integration helps companies develop, diversify, and expand their markets. Horizontal integration improves a company’s market position by making it more competitive in its supply chain than switching to a new one.
The Verdict
Horizontal integration may help companies grow, generate revenue, add product lines, and diversify operations. Horizontal integration happens when related organizations integrate into the same supply chain stage. In contrast to vertical integration, which moves a business up or down the supply chain, horizontal integration strengthens its place in production.
Conclusion
- The horizontal integration technique involves a company expanding within the same industry at the same level.
- Horizontal integrations increase revenue, market share, product diversity, and reduce competition.
- Horizontal integration risks regulatory scrutiny, decreased customer choice, internal flexibility loss, and value destruction.
- Mergers, acquisitions, and internal expansion can horizontally integrate a corporation.
- In contrast to horizontal integration, vertical integration involves acquiring a company in the same industry but at a different stage of production.
