In a previous article we have been speaking about the vertical integration both backward and forward. It is time to introduce a new concept, the horizontal integration.
The simple definition of the horizontal integration is that it happens when two or more companies which produce the same or similar goods or provide the same/similar services merge together. When all the producers of goods/services merge, they create a monopoly. If on the other hand, they are still few competitors left after the merger there will be an oligopoly.
As in the case of vertical integration, horizontal integration has its own advantages and disadvantages. But first let’s take a look at some of the companies who have implemented this concept and to evaluate how successful they were. These are the examples of Horizontal integration.
After reaching a certain level of success, Walt Disney has been considering ways to expand and increase profits. Disney started out as an animation studio targeting children and families, which also represent their currently core target audience. However, in the process of diversifying and developing their company, Disney did a horizontal integration into live action films (For example, Pirates of the Caribbean series). In this manner the company managed to reach new audiences and control a bigger share of the film industry.
Another good example would consist in the merging of two consultancy and trading companies. One of them is placed in Europe and the other one in UAE. The first one with only 125 employees is going to merge with the second one with more than 25000 employees. The company from Europe is receiving a high number of projects for UAE, but in order to develop them, they need more financial and human resources.
However, this company has created itself a name on the European market and has the relevant expertise to conduct many kind of projects. On the other hand, the company from UAE, having the necessary resources is lacking the brand reputation that the previous company managed to create. A horizontal integration in this case would represent a win-win situation for both of the parties involved. The UAE company will get the brand pull with this integration, and the European company will get the localized expertise.
A horizontal integration can generally be described as involving less control (compared to the vertical integration). Horizontal integration increases dependency of both partners on each other. Moreover, trust is an important factor in Horizontal integration as lack of trust can cause the integration to break. Thus, you will generally see horizontal integration taking its own sweet time to fall through.
Horizontal integration can prove to be a successful strategy when
- Your company competes in a growing industry
- Your competitors are lacking capabilities, skills or resources that you can provide
- The cooperation can lead to a monopoly that would be allowed by the government
- The economies of scale would have a significant effect.
What works for a company doesn’t mean that is also going to work for you. There is no magical recipe. The answer lies in your unique value proposition as well as you own resources and capabilities. Therefore the model that provides the greatest operating leverage and opportunity for success and growth is also based two important factors – The synergy that can be achieved by using a common brand name in order to promote different products or services, and on the most important element of the company, the value chain.