What is Horizontal Integration?
Horizontal integration is the acquisition of a business operating at the same level of the value chain in the same industry—that is, they make or offer similar goods or services. This is in contrast to vertical integration, where firms expand into upstream or downstream activities, which are at different stages of production.
- Horizontal integration is a business strategy in which one company acquires or merges with another that operates at the same level in an industry.
- Horizontal integrations help companies grow in size and revenue, expand into new markets, diversify product offerings, and reduce competition.
- Disadvantages of horizontal integration include regulatory scrutiny, the reduction of choices for consumers, less internal flexibility, and the potential to destroy value rather than create it.
- A contrasting approach to horizontal integration is vertical integration, in which a company acquires a firm operating in the same industry, but at a different stage of the production process.
Understanding Horizontal Integration
Horizontal integration is a competitive strategy that can create economies of scale, increase market power over distributors and suppliers, improve product differentiation and help businesses expand their market or enter new markets. By merging, two businesses may be able to produce more revenue than they would have been able to do independently.
However, when horizontal mergers succeed, it is often at the expense of consumers, especially if the merger reduces competition. For this reason, horizontal mergers are heavily scrutinized by regulators, to see if they violate antitrust laws.
Indeed, the real motive behind a lot of horizontal mergers is that companies want to reduce competition—either from potential new entrants, established rivals, or firms offering substitute or alternative goods.
These are three of the five competitive forces that shape every industry, as identified in Porter’s Five Forces model. The other two forces, the power of suppliers and of customers, drive vertical integration.
Advantages and Disadvantages of Horizontal Integration
Companies engage in horizontal integration to benefit from synergies. There may be economies of scale or cost synergies in marketing; research and development (R&D); production; and distribution. Or there may be economies of scale, which make the simultaneous manufacturing of different products more cost-effective than manufacturing them on their own.
Procter & Gamble’s 2005 acquisition of Gillette is a good example of a horizontal merger that realized economies of scope. Because both companies produced hundreds of hygiene-related products from razors to toothpaste, the merger reduced the marketing and product development costs per product.
Synergies can also be realized by combining products or markets. Horizontal integration is often driven by marketing imperatives. Diversifying product offerings may provide cross-selling opportunities and increase each business’ market. A retail business that sells clothes may decide to also offer accessories. Or it might merge with a similar business in another country to gain a foothold there and avoid having to build a distribution network from scratch.
Drawbacks of Horizontal Integration
Like any merger, horizontal integration does not always yield the synergies and added value that was expected. It can even result in negative synergies which reduce the overall value of the business, if the larger firm becomes too unwieldy and inflexible to manage, or if the merged firms experience problems caused by vastly different leadership styles and company cultures.
Then there are regulatory issues. If horizontal mergers within the same industry concentrate market share among a small number of companies, it creates an oligopoly. If one company ends up with a dominant market share, it has a monopoly. And if a merger threatens competitors, or seems to drastically restrict the market and reduce consumer choices, it could attract the attention of the Federal Trade Commission.
Examples of Horizontal Integration
Examples of horizontal integration in recent years include the 2017 merger of The Walt Disney Company and 21st Century Fox (motion pictures/entertainment); Marriott's 2016 acquisition of Starwood Hotels & Resorts; Anheuser-Busch InBev's 2016 acquisition of SABMiller (brewers); and AstraZeneca's 2015 acquisition of ZS Pharma (biotech).
Older examples include Volkswagen’s 2012 acquisition of Porsche (automobiles), Facebook Inc.'s (now Meta Inc.'s) 2012 acquisition of Instagram (social media), Disney's 2006 acquisition of Pixar (entertainment media), and Mittal Steel’s 2006 acquisition of Arcelor (steel).