What Is Horizontal Integration?

Horizontal integration is the acquisition of a business operating at the same level of the 澳洲幸运5官方开奖结果体彩网:value chain in the same industry—that is, they make or offer similar goods or services. This is in contrast to 澳洲幸运5官方开奖结果体彩网:vertical integration, where firms 𒊎expand into upstream or downstream activities, which are at different stages of production.

Understanding Horizontal Integration

Horizontal integration is a competitive strategy that can create economies of scale, increase 澳洲幸运5官方开奖结果体彩网:market power over distributors and suppliers, improve 澳洲幸运5官方开奖结果体彩网:product differentiation and ꦺhelp businesses expand their market or enter new markets. By merging, two bu🥀sinesses may be able to produce more revenue than they would have been able to do independently.

However, when 澳洲幸运5官方开奖结果体彩网:horizontal mergers succeed, it is often at the expense of consumers, especially if the merger reduces compet💧ition. For this reason, horizontal mergers are heavily scrutinized by regulators, to see if they violate antitrust laws.

Indeed, the real motive behind a lot of horizontal mergers is that companies want to reduce competition—either from potential new entrants, established rivals, or firms offering ౠsubstitute or alternative goods.

Types of Horizontal Integration

There are three primary forms of horizontal integration: merge👍rs, acquisitions, and internal expansions.

Merger

When two companies merge, two separate entities create a new, joint organization. The brand of one of those two companies is usually retained, though the composition of operations and personnel is shared between both of the former individual companies. In addition, the product line of both companies is often similar aꦇnd e🔯qually competitive in the market.

In a merger, both companies are striving to become a larger presence in their existing market. Most mergers are of similar firms, where integration of th🌄e two companies may be seamless due to the similarities between what the two former companies used to do.

Acquisition

Similar to a merger, an acquisition occurs when one company outright takes over the operations of another company. Though the two companies technically join together, one company remains in control. The acquiring company's staff, 澳洲幸运5官方开奖结果体彩网:executives, and operations often remain in place, while the acquired company's resources are integrat🐼ed as management sees fit.

Companies often pursue acquisitions in an attempt to get something specific. For example, Microsoft specifically wanted to enhance its presence in the video game market. Therefore, it acquired Activision Blizzard in January 2022. This example of an acquisition shows an often deliberate stra🔥tegy for a specific sector in which a company wants to achieve a very speci𒁃fic goal.

Internal Expansion

Companies can also embark on horizontal integration by making more conscious allocations of internal capital. Through internal expansion, a company simply chooses to s꧃trategically change course and apply more resources in a different way. For example, a restaurant can expand to offer catering companies, or a beverage manufacturer may branch off to make food products.

In these examples, a company continues to operate how it use to. However, instead of committing capital to acquire an external company or transition with a merging firm, it decides to deploy those resources in-house to train staff, buy equipment, make 澳洲幸运5官方开奖结果体彩网:capital investments, and grow a new branch of operation𒁏s on its own.

Advantages and Disadvantages of Horizontal Integratio🌼n

Advantages

Companies engage in horizontal integration to benefit from synergies. There may be economies of scale or 澳洲幸运5官方开奖结果体彩网:cost synergies in marketing; research and development (R&D); production; and distribution. Or there may be ཧeconomies of scale, which make the simultaneous manufacturing of different products more cost-effective than manufacturing them on their own.

Procter & Gamble’s 2005 acquisition of Gillette is a good example of a horizontal merger that realized economies of scope. Because both companies produced hundreds of hygiene-rel♏ated products from razors to toothpaste, the merger reduced the marketing and product develop💟ment costs per product.

Synergies can also be realized by combining products or markets. Horizontal integration is often driven by marketing imperatives. Diversifying product offerings may provide 澳洲幸运5官方开奖结果体彩网:cross-selling opportunities and increase each bus🃏iness’ market. A retail business that sells clothes may decide to also offer accessories or it might merge with a similar business in another country to gain a foothold there and avoid having to build a distribution network from scratch.

Disadvantages

Like any merger, horizontal integration does not always yield the synergies and added value that was expected. It can even result in negative synergies which reduce ꦯthe overall value of the business, if the larger firm becomes too unwieldy and inflexible to manage, or if the merged firms experience problems caused by vastly different leadership styles and com🥂pany cultures.

There are regulatory issues as well. If horizontal mergers within the same industry concentrate market share among a small number of companies, it creates an 澳洲幸运5官方开奖结果体彩网:oligopoly. If one company ends up with a dominant market share, it has a monopoly. If a merger threatens competitors or seems to drastically restrict the market and reduce consumer choices, it could attract the attention of the 澳洲幸运5官方开奖结果体彩网:Federal Trade Commission.

Horizontal Integration vs. Vertical Integration

Both horizontal integration and vertical integration are the practice of a company expanding its current operations. However, each process aims to have a different strategic outcome. Horizontal integration occurs when a company aims to remain within its current part of the supply chain. The company often wants 🦹to enhance its existing product or get a larger share of the market.

Vertical integration is the strategy of expanding across the supply to get better at processes the company is currently not involved in. For example, a 澳洲幸运5官方开奖结果体彩网:manufacturer may acquire a raw materials distributor to have better control over the quantity, pricing, or timing of when it gets raw goods. The company is expanding from its current position in the manufacturing process and performing a back꧟ward vertical integration.

Vertical integration is often undertaken to have better control over a long process, while horizontal integration is more suitable for a company wanting to become more niche for something specific. Horizontal integration often e🌠ntails similar companies coming together, while vertical integration often entails different companies related to a similar product cꦿoming together.

The ultimate goal of vertical integration is to become independent of 澳洲幸运5官方开奖结果体彩网:suppliers and control more aspects of the supply chain. On the other hand, horizontal integration strive꧋s to eliminate competitors, grow in market size, and create economies of scale.

Examples of Horizontal Integration

Many mergers that hit news headlines are examples of horizontal integration. If a company acquires or merges with another company and both firms are in a very similar industry, it is most likel♏y an example of horizontal integration. Specific example🎶s include:

• JetBlue's 2022 merger with Spirit Airlines
• Marriott's 2016 acquisition of Starwood Hotel & Resorts
• Anheuser-Busch InBev's 2016 acquisition of SABMiller (brewers)
• AstraZeneca's 2015 acquisition of ZS Pharma (biotech)
• Volkswagen’s 2012 acquisition of Porsche (automobiles)
• Facebook Inc.'s (now Meta Inc.'s) 2012 acquisition of Instagram (social media)
• Disney's 2006 acquisition of Pixar (entertainment media)
• Mittal Steel’s 2006 acquisition of Arcelor (steel)

The Bottom Line

Companies looking to grow in size, increase revenue, expand to new product lines, and diversify operations may consider pursuing horizontal integration. Horizontal integration occurs when similar companies merge in the same stage of a supply chain merge. As opposed to a vertical integration which helps a company shift to earlier or later in the supply chain, horizontal integration further solidifies a company's current position along a manufacturing process.