Horizontal integration – Definition, Examples, Advantages

Definition

Horizontal integration happens when two or more companies producing the same or similar goods or providing the same/similar services merge together to produce a horizontally integrated firm.

It is a strategy used to increase the power of individual players in the industry or as a competitive tactic to destroy small competitors in the industry. Alternatively, horizontal integration between several small players means they have the power to take on giants as well.

What is Horizontal Integration?

Horizontal integration happens when two companies who are in similar segments, want to improve their strength. Thus one company might absorb the other or both companies merge together and create a standard operating procedure after the merger.

The purpose and objective of horizontal integration can be multiple. Maybe the company wants to increase the market share, or it wants to increase product diversification. It is also possible that the company wants to avoid a price war by reducing competition. Company may want to achieve economies of scale by acquiring another manufacturing facility and supply chain.

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 competitive have unique abilities or they require your skills and resources.
• The industry is growing and the competitors will benefit with a merger
• The horizontal integration leads to a monopoly and thereby stability of the market under control of government.
• Achieving economies of scale

Horizontal integration is an excellent competitive strategy but can be bad for customers. 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. When two companies within the segment get merged or an acquisition happens, the parent company gets all powerful and might drive the terms in the market for that industry. Thus, the one to suffer are possibly the customers.

Example of Horizontal Integration

Let’s take a look at some of the companies who have implemented this concept and to evaluate how successful they were. These are 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). Recently, Disney has taken over 20th century fox, Star networks and a majority control of Media.

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.

List of some Famous Horizontally Integrated Firms

• Amazon >> Whole Foods
• Walmart >> Flipkart
• Disney >> 20th Century Fox / Marvel and others
• Kraft Foods >> Cadbury
• Mittal Steel >> Arcelor
• Microsoft >> Yahoo!
• HP >> Compaq

Advantages of Horizontal Integration

• Synergy – Better synergy
• Economies of Scale
• Cost Advantages
• Better research and Development
• Higher production and more control over distribution
• Product expansion and diversification
• Better Marketing and Brand reputation
• Cross Selling

Disadvantages of Horizontal Integration

• Firm suddenly becomes large and therefore difficult to manage.
• Poor takeover exercise can leave employees dissatisfied causing loss of key players / employees
• Changes in leadership and organization culture can affect the integration
• High exposure to debts due to takeover exercise can cause a downfall
• Government intevention or change in policies can cause problems

Conclusion on Horizontal Integration

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.