One of the main objectives of many businesses and companies is to gain a competitive advantage by either removing competition or gaining an upper hand over competitors. Horizontal integration is one such strategy that helps businesses to achieve their goals.
Today, we’ll discuss horizontal integration, its pros and cons, and examples.
What is Horizontal Integration?
Horizontal integration is a process when one company acquires another company that is operating in the same industry and supply chain. Businesses and companies use horizontal integration to strengthen their market position.
For instance, Pixar (movie Production Company) merges with Disney, and Daimler Benz and Chrysler (car production and Retailing Company) merges with Exxon with Mobile (oil production, distribution, and refining company).
Different companies go for horizontal integration strategies for various reasons like reducing and eliminating competition, economies of scale, differentiating product portfolio, and business expansion. Sometimes, it also leads toward monopoly and oligopoly when businesses merge in the same industry.
It’s the customers that have to pay the price if a company permanently eliminates the competitors. If a small number of companies merge and share their market shares, it would result in the form of oligopoly. If one company dominates the market, it would result in the form of a monopoly.
How Horizontal Integration Works?
Horizontal integration could take place in the form of acquisition, merger, and takeover.
The acquisition is when a business buys another business/company.
A merger is when two independent businesses of the same time decide to share their resources and become a single entity.
A hostile takeover is when a business forcefully buys another business/company that doesn’t agree with the terms.
Why Horizontal Integration Is Important
If the management implements the horizontal integration strategy efficiently, then it would amplify the customer market share. It’s because both companies are sharing their resources, market share, and product lines.
Horizontal integration allows companies to increase the profit of all the partner businesses that wouldn’t have possible under the fierce competition, and if they compete for the market individually. It would also help them to lower the cost through sharing of institutional knowledge and experience.
Horizontal integration and merger usually result in the form of monopoly, and the partner companies dominate the market.
Advantages of Horizontal Integration
Ease of Trade
The laws and regulations of different governments and countries are different. It would take a lot of time and resources to start every business from the scratch. Horizontal integration and merger allow you to lower international trade costs by developing partnerships with foreign companies in their countries.
Economies of Scale
Economies of scale are when you have a lower cost due to the bulky amount of production and manufacturing. When businesses combine production processes, it reduces the production cost.
Economy of Scope
The economy of scope is when companies achieve lower marginal cost over some time; it’s because of the manufacturing of complementary products and services. In other words, we can say it’s the variety and efficiency, not just the bulky quantity of products.
Horizontal integration would result in the form of efficient distribution, production system, research and development, marketing and promotion, and competitive price offers. Other competitors couldn’t provide such offers. Most importantly, the combined resources and efficiency won’t always develop something new, it may complement the existing product portfolio.
One of the most important benefits of horizontal integration lowers the competition from the market. When your company either merges or acquires a competitor, it would increase the market share. It would also shift the negotiating power balance.
Horizontal integration helps businesses and companies to multiply their income and profitability. It’s because of the larger customer base, increasing sales, and market share.
When two brands share their resources, it would also increase the overall customer base locally and internationally.
Disadvantages of Horizontal Integration
Government scrutiny and laws and regulations would come into play because of the antitrust lawsuits. The merging and acquisition result in the form of monopoly and eliminating the competition from the market. It means one player would dominate the market and it’s against the idea of the free market.
When two giants companies combined, they become too big and inflexible to handle. It’s because they involve so many operations going on at various points, office culture, and leadership styles of different organizations are different. They face a real issue while launching a new product.
Doesn’t Always go as Planned?
Sometimes horizontal integration doesn’t give you the required positive result whatever you’re expecting. In some cases, it decreases the overall profitability and value.
When is horizontal integration attractive for a business?
Companies should think of horizontal integration under the following circumstances;
- When they have sufficient management and operation capacity to handle the integration
- If it could provide economies of scale
- The rival and competitors don’t have the experience and expertise
- When business is growing
Examples of Horizontal Integration
Facebook and Instagram
Facebook bought Instagram in 2012 for 1 billion US dollars. Both companies are operating their business in the social media industry and photo-sharing platforms. However, when Facebook saw the growth and productivity of the competitive social sharing platform, Instagram, FB bought the new platform and eliminated the competition. Facebook nowadays owns Instagram, but it operates independently.
Vodafone & Hutchison
Vodafone is the UK’s telecom company and Hutchison is based in Hong Kong. They both are operating in the same industry but in different markets. However, Hutchison wasn’t performing very well. On the other hand, Vodafone had additional plans of expanding its business in the Indian market, and Hutchison had already established its market in Asia. Vodafone bought a 67% share of Hutchison for 11.1 billion dollars.
Disney and Pixar
Disney is a film producing company and Pixar is a computer animation studio company. Disney bought Pixar in 2006 for 7.4 billion dollars. Pixar managed to maintain its core value and work culture and never allowed Disney to change it.
Marriot and Starwood Hotels
Marriot bought Starwood Hotels in 2016 and became the world’s largest hotel and Restaurant Company. Marriot has the advantage of being a luxury brand and Starwood had a strong global presence. The objective of the acquisition was to expand the business portfolio of the company.