What is Horizontal Integration?

Horizontal Integration- Meaning, Advantages & Disadvantages

Horizontal Integration

Horizontal integration is another competitive strategy that companies use. An academic definition is that horizontal integration is the acquisition of business activities that are at the same level of the value chain in similar or different industries. In simpler terms, horizontal integration is the acquisition of a related business: a fast-food restaurant chain merging with a similar business in another country to gain a foothold in foreign markets.

As we have seen, is a company’s acquisition of a similar or a competitive business-it may acquire, but it may also merge with or takeover, another company to strengthen itself to grow in size or capacity, to achieve economies of scale or product uniqueness, to reduce competition and risks, to increase markets, or to enter new markets.

Quick examples of horizontal expansion are Standard Oil’s acquisition of about 40 other refineries and the acquisition of Arcelor by Mittal Steel and that of Compaq by HP.

When is horizontal integration attractive for a business?

A company can think of acquisitions and mergers for horizontal integration in the following situations:

  • When the industry is growing
  • When rivals lack the expertise that the company has already achieved
  • When economies of scale can be achieved
  • When the company can manage the operations of the bigger organisation efficiently, after the integration

Advantages of Horizontal Integration

The advantages of horizontal integration are economies of scale, increased differentiation (more features that distinguish it from its competitors), increased market power, and the ability to capture new markets.

  • Economies of scale:

    The bigger, horizontally integrated company can achieve a higher production than the companies merged, at a lower cost.

  • Increased differentiation:

    The company will be able to offer more product features to customers.

  • Increased market power:

    The new company, because of the merger of companies, will become a bigger customer for its old suppliers. It will command a bigger end-product market and will have greater power over distributors.

  • Ability to enter new markets:

    If the merger is with an organisation abroad, the new company will have an additional foreign market.

Disadvantages of Horizontal Integration Strategy

  • As touched upon earlier, the management of a company should be able to handle the bigger organisation efficiently if the advantages of horizontal integration are to be realised.
  • The legal ramifications will have to be studied as there are strict anti-monopoly laws in many countries: if the merged entity threatens to oust competitors from the market, these laws will be used against it.
  • Standard Oil, which was seen as a powerful conglomerate brooking no competition, was split up into over 30 competing companies in an ‘anti-trust case.
  • As a company grows bigger with horizontal integration, it might become too rigid, and its procedures and practices may become unfriendly to change. This could prove dangerous to it.
  • Moreover, synergies between companies that may have been predicted may prove elusive or non-existent (for example, the failed horizontal integration of hardware and software companies merged in the expectation of “synergies” between their products).

Conclusion

The decision whether to employ vertical or horizontal integration has a long-term influence on the business strategy of a company.

Each company will have to choose the option more suitable to it, based on its unique place in the market and its customer value propositions.

A deep analysis of its strengths and resources will help it make the right choice.

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