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What is a Horizontal Integration?
What’s important to know about it?
In this article, I will break down the meaning of Horizontal Integration so you know all there is to know about it!
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Table of Contents
What Is Horizontal Integration
Horizontal integration refers to the instances when a company acquires another company in the same industry having a similar business model.
In other words, when a company is engaged in horizontal integration, it is looking to grow its current business operations, get into new markets, add additional products to its portfolio, or simply get rid of the competition.
For example, a company that produces personal computers acquires another company producing personal computers but in another geographic territory.
With this horizontal acquisition, the acquiring firm’s intention is to increase its market share.
A company can horizontally integrate by investing its own resources and organically expanding its operations or it can acquire an operating company.
When large companies perform horizontal integrations, regulators may get involved to ensure that the company is not exercising too much control in the market and preventing healthy competition.
Keep reading as I will further break down the meaning of horizontal integration and tell you how it works.
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How Does Horizontal Integration Work
Horizontal integration is a business strategy where a company’s objective is to increase its revenues, expand into new markets, add additional products to its portfolio, or achieve greater market power.
As the name suggests, the company is looking to integrate “horizontally” which means to expand business operations within its current industry.
The idea here is that horizontal integration should allow the company to create more value and be more competitive in the market.
For example, two companies in the same industry combined may be able to generate more revenues than both companies acting independently.
This can be the case if the companies can share resources, coordinate their production, use their established distribution channels, or share their know-how.
In some cases, a company may engage in horizontal integration to eliminate its competitors or exercise significant market power and influence.
If that’s the case, to prevent consumers from ultimately paying the price, regulators will investigate the company’s horizontal integration strategies to ensure that it is not violating antitrust laws by exerting too much market power.
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Benefits of Horizontal Integration
In business, there are several benefits to horizontal integration.
The most common reason why companies will pursue horizontal integration is to increase their market share.
For instance, a company may be able to increase its market share by expanding into new territories, offering complementary products to its customers or improving its business operations.
Another reason why horizontal integrations are beneficial when two companies merge is that they can immediately expand their customer base.
The combined entity will have a larger customer base allowing it to offer more products and services.
Another consequence of horizontal integration is that the company can increase its revenues.
For instance, when a company acquires another horizontally, it will generate more revenues through more customers but it will also have the ability to upsell or cross-sell to them.
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Drawbacks of Horizontal Integration
Although horizontal integration can be beneficial in many cases, it can also have important drawbacks.
The first important drawback is that when horizontal integration is performed by very large companies, regulators may take notice.
The reason that is the case is that large companies exercising too much market influence and power can eventually become monopolies.
Ultimately, if the industry is dominated by one or a few large firms, it will be detrimental to consumers.
Large horizontal integration attempts will generally be scrutinized by regulators and carefully assessed for antitrust violations.
Another important drawback to horizontal integration is that the merged companies will not be as agile as they used to be independently.
When a company acquires another or merges with another, it’s important that they find ways of integrating their businesses with one another.
If they are unable to streamline their combined operations, have cultural clashes, or are unable to take advantage of one another’s strengths, it may end up hurting its business.
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Types of Horizontal Integration
There are different types of horizontal integration strategies, namely a merger, acquisition, or internal expansion.
A merger is when two companies merge with one another.
In the context of a merger, the merged entity will have the combined revenues, combined customer base, combined products and services, combined knowledge, technology, and so on.
In essence, the merged entities become a much larger version of the entities prior to the merger.
Another strategy is for one company to acquire another.
In the context of an acquisition, one company takes control of another and determines how extensively it will integrate the operations of the target company within its own.
In some cases, the acquiring company may want to keep the target company’s operations intact whereas in other cases it may want to absorb some of the operations within its own.
The third strategy of horizontal integration is through an internal expansion where the company invests capital and resources to further expand its market and revenues.
For example, a company may invest to launch its product in a new market (instead of buying a similar company already established in that market).
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Horizontal Integration vs Vertical Integration
What is the difference between horizontal integration and vertical integration?
Although both horizontal and vertical integration strategies allow companies to expand their business operations, they differ in how the companies go about it.
With horizontal integration, a company’s looking to grow its current business within the same industry.
In essence, it is looking to remain focused on its core business strengths and remain within the same stage of the supply chain.
For example, a chain of restaurants acquires another restaurant chain having a similar menu.
On the other hand, vertical integration is a strategy where a company’s objective is to control more stages in the supply chain.
The idea is for a company to either acquire companies upstream in its supply chain or downstream.
The main objective for a company is to have better control of its production process, distribution and sale to end customers.
The more a company is independent of its suppliers, the more it is vertically integrated.
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Horizontal Integration FAQ
What is an example of horizontal integration?
There are many examples of horizontal integration that can be considered.
Here are some examples of a company performing horizontal integration:
- An airline company acquires another airline company
- A hotel chain acquires another hotel chain
- A media company acquires a competing media business
As you can see, the common element is that a company is that horizontal integration takes place between companies within the same industry.
Why integrate horizontally in business?
There are many reasons that drive companies to horizontally integrate.
The most common reason why a company may horizontally integrate with another is to achieve immediate expansion of revenues and market share.
Also, since the companies operate in the same industry, they can use their combined knowledge and know-how to improve their processes, reduce costs, and achieve greater economies of scale.
Other reasons will be to acquire resources, competencies, skilled resources, technology, intellectual property or other know-how allowing the business to be more competitive in the market.
Who uses horizontal integration?
Companies that are looking to increase their revenues in their current industry, increase their market share, or achieve greater market dominance are good candidates for horizontal integration.
With this type of integration, businesses in the same industry join forces, resources, and competencies to achieve competitive advantage and economies of scale.
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So there you have it folks!
What does horizontal integration mean?
In a nutshell, horizontal integration is when a company operating in the value chain within the same industry merges with one another.
The immediate result of horizontal integration is that the merged entity will be larger, have a larger customer base, and can potentially become more competitive in the market.
Horizontal integration is different from vertical integration as it involves companies operating within the same industry and at the value chain rather than owning more steps in the supply chain.
It’s important that companies looking to expand their business operations through horizontal integration carefully assess their strategy to ensure it will create value.
If the merging entities or acquirers cannot streamline operations post-transaction, tap into the larger customer base, or take advantage of synergies, the integration may fail.
Now that you know what horizontal integration means and how it works, good luck with your research!
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