Horizontal integration occurs when a company decides to merge, acquire or take over another company in the same industry at the same stage of production. This is typically seen as a competitive strategy. It is not to be confused with lateral integration, which sees the merger of two companies that sell related products or services, but are not in direct competition with each other.
When it is done correctly, there are many advantages to horizontal integration. These include (but are not limited to) an increase of market power or market share, reduced competition and increases in other synergies. But as with anything else, there are also downsides. Among them are antitrust issues and legalities, the reduction in flexibility and destroying value rather than creating it.
We'll look a little more closely at some of the pros and cons of this strategy mentioned above. But before that, here are a couple of well-known examples of horizontal integration you may recognize.
Examples of Horizontal Integration
As mentioned above, horizontal integration takes place when two companies that compete in the same industry merge during the same stage of production. One such example is Disney's acquisition of Pixar in 2006. Disney was facing stagnation in the market, but was rejuvenated after the purchase of Pixar. The two companies were operating in the same (animation) space and were able to merge their technology, therefore increasing market share and profitability.
The merger of Exxon and Mobil is another great example of a horizontal integration. As individual entities, the two were similar in size and operation and joined together to form a stronger company in 1998.
Advantages of Horizontal Integration
There are numerous benefits to undergoing a horizontal integration. The most obvious benefit is by market share or market power. When the two companies merge, they also combine the product base, technology and services that are available on the market. With more products out there under one name, the new company can increase its foothold among consumers.
Here are a few other advantages of going through a horizontal integration:
- Increasing consumers: Because the two companies may be operating in the same industry, they may not necessarily have the same consumer base. By merging the two companies into one, the new organization now has access to a larger base of customers.
- Increasing revenue: By increasing its customer base, the new company can now boost its revenue. In fact, it's typical for companies that undergo a horizontal integration to see more revenue than when they were individual entities.
- Reducing competition
- Increasing other synergies such as marketing
- Creating economies of scale and economies of scope
- Reducing other production costs
Cons of Horizontal Integration
As with any process, there are also disadvantages that must be considered along with the benefits.
The first and most troublesome is the level of scrutiny this kind of strategy faces — especially from governmental agencies. Big mergers like these are the reason why antitrust laws in place. These laws prevent big corporations from acquisitions and mergers that would narrow the competitive market, therefore creating a monopoly. This is seen as being a predatory act, giving one player dominance in the market. It creates the idea that the large corporation may take advantage of consumers with higher prices and narrow product/service choices.
Other cons of horizontal integration include:
- Stunting economic growth of the new enterprise
- Reduced flexibility: This happens because the company is now a larger organization. The addition of more personnel and processes means the need for more transparency and therefore, more accountability and red tape.
- Destroying value rather than creating it: This happens because the synergies never materialize despite the costs of the horizontal integration.
The Bottom Line
Undergoing a horizontal integration can be very beneficial for two companies. Typically, this happens when two companies are competing in the same industry at the same stage of production. But before considering it, businesses should weigh out the pros and cons of the strategy and how it plays out for their bottom line as one, large organization.