What is Horizontal Integration?
Horizontal integration is a business strategy where a company acquires, merges with or takes over another company in the same industry and at the same stage of production. This is done to achieve various objectives, such as increasing market share, reducing competition, achieving economies of scale, or improving efficiency. The ultimate aim is often to increase profitability and stakeholder value.
Importance of Horizontal Integration
- Market Power: One of the primary benefits is increased market power. By absorbing a competitor, a company can increase its market share, thereby strengthening its position in the market.
- Cost Efficiency: Horizontal integration can lead to economies of scale. This occurs when the cost per unit of output decreases as the scale of operations increases.
- Product Diversification: Sometimes, horizontal integration can help in diversifying the product range, which can be a risk mitigation strategy.
- Strengthening Brand: With a broader portfolio and market presence, a company can strengthen its brand equity.
- Operational Synergies: It can result in operational efficiencies by combining the best practices of both firms.
- Access to Distribution Channels: Acquiring a competitor often comes with the added benefit of gaining access to their distribution channels.
Types of Horizontal Integration
- Mergers: Two companies combine to form a new entity. Both companies cease to exist in their original form, and their assets and liabilities are combined.
- Acquisitions: One company buys another. The acquired company may continue to operate as a subsidiary or may be absorbed entirely.
- Joint Ventures: Two or more companies collaborate on a specific project or business activity while remaining separate entities.
- Franchising: This involves granting a license to other business entities to conduct business using the name and business model of the franchisor.
- Alliances: Strategic partnerships can also be considered a form of horizontal integration, especially when they lead to the sharing of resources and capabilities.
Examples of Horizontal Integration
- Disney’s acquisition of 21st Century Fox: This expanded Disney’s content library and helped with the launch of its own streaming service, Disney+.
- Facebook acquiring Instagram: Facebook expanded its social media portfolio and neutralized a potential competitor by acquiring Instagram.
- Heinz and Kraft Foods Merger: Both food processing companies, they merged to benefit from each other’s brands and to achieve economies of scale.
- Exxon-Mobil: Exxon and Mobil were two separate oil companies before they merged to form ExxonMobil, the world’s largest publicly traded oil and gas company.
Issues and Limitations of Horizontal Integration
- Regulatory Scrutiny: Companies looking to integrate horizontally often face challenges from regulatory bodies concerned with maintaining competition in the marketplace.
- Integration Challenges: Merging different organizational cultures, systems, and operations can be difficult.
- Loss of Jobs: Redundancies often occur after integration, leading to job losses, which can have social implications.
- High Costs: The process can be expensive, involving not just the acquisition costs but also costs associated with integration, and there’s no guarantee of success.
- Risk Concentration: By focusing too much on one industry, companies could be at risk if the industry goes into a downturn.
- Monopoly Risks: Too much market power can lead to monopolistic behavior, which can be detrimental to consumers and the overall market.
Horizontal integration can be a beneficial strategy for business growth and competitive advantage, but it comes with its own set of challenges and limitations. Companies need to carefully weigh the pros and cons before embarking on such a strategy.