Horizontal integration is a pivotal business strategy that involves acquiring or merging with a company at the same stage of the value chain in the same industry. Unlike vertical integration, where a firm expands to different production stages, horizontal integration focuses on consolidating one’s current market position and broadening its base of similar products or services.
Key Takeaways:
- Horizontal integration involves a company expanding its operations at the same level within an industry.
- It helps companies grow in size, boost revenue, penetrate new markets, diversify products, and minimize competition.
- Potential downsides include regulatory scrutiny, reduced consumer choices, less flexibility, and possible destructiveness instead of added value.
- Methods of horizontal integration are mergers, acquisitions, and internal expansions.
- Contrasting strategy: Vertical integration pertains to expanding into different stages of production within the same industry.
Understanding Horizontal Integration
Horizontal integration offers the rationale of economies of scale, increased market power, enhanced product differentiation, and streamlined entry into new markets. Combining resources from two entities often results in a revenue boost greater than individual outcomes.
However, successful horizontal mergers may negatively impact consumers due to reduced competition, prompting regulatory investigations to ensure antitrust laws compliance. A primary reason for horizontal mergers is to curtail competition - including rivals, newcomers, or those with substitute products, aligning with three of the five forces in Porter’s Model.
Types of Horizontal Integration
Merger
In a merger, two companies unify into a new joint entity. Typically, one firm’s brand sustains while combining operations and personnel from both original firms. Often, similar competitive product lines facilitate a smoother merger aiming to become a dominant market player.
Acquisition
An acquisition occurs when one company absorbs another, gaining control. The acquiring company integrates the acquired’s resources as required to achieve specific strategic goals, as illustrated by Microsoft’s purchase of Activision Blizzard to bolster its video gaming division in January 2022.
Internal Expansion
Through deliberate allocation of internal capital, companies can horizontally integrate, expanding their services or product lines within their existing market infrastructure. For example, a beverage producer branching into food products by internally deploying resources underscores this method.
Advantages and Disadvantages of Horizontal Integration
Advantages
- Efficiency and Synergies: There can be cost-saving benefits in marketing, R&D, production, and distribution.
- Economies of Scale: Benefits from producing diversified products cost-effectively.
- Improved Market Position: Diversified offerings potentially leading to greater market penetration and cross-selling opportunities.
- Global Expansion: Easing entry into new markets without starting from scratch using alliances.
Disadvantages
- Integration Challenges: Unexpected issues can arise if the merger does not bring about the anticipated synergy or reduces value.
- Regulatory Scrutiny: Formation of monopolies or oligopolies may attract regulatory intervention.
- Complex Management: Combining different company cultures might introduce rigidity and problems in management agility.
Horizontal vs. Vertical Integration
Both horizontal and vertical integrations are methods of business expansion but have divergent strategic objectives. Horizontal integration involves merging with similar companies to leverage market presence or enhance product capacity within the same customer space. In contrast, vertical integration involves acquiring firms at different supply chain stages to secure resource control or advanced distribution.
Examples of Horizontal Integration
Real-world horizontal integrations, typically headline-making mergers, include:
- JetBlue’s 2022 merger with Spirit Airlines
- Marriott’s 2016 acquisition of Starwood Hotel & Resorts
- Anheuser-Busch InBev’s 2016 acquisition of SABMiller
- AstraZeneca’s 2015 acquisition of ZS Pharma
- Volkswagen’s 2012 acquisition of Porsche
- Meta Inc.’s (formerly Facebook Inc.) 2012 acquisition of Instagram
- Disney’s 2006 acquisition of Pixar
- Mittal Steel’s 2006 acquisition of Arcelor
Conclusion
Companies embarking on horizontal integration aim to cement their market position, expand revenues, and diversify product lines within the same production stage. Horizontal integration stands as a strategic move fostering increased market competitiveness and economies of scale, in contrast to vertical integration focusing on extending supply chain control. Horizontal integration is a tactical approach for businesses pursuing optimized growth within their existing industry niche.
Related Terms: Vertical Integration, Economies of Scale, Market Expansion, Merger, Acquisition, Internal Expansion.
References
- Harvard Business School, Institute for Strategy & Competitiveness. “The Five Forces”.
- Microsoft. “Microsoft to Acquire Activision Blizzard to Bring the Joy and Community of Gaming to Everyone, Across Every Device”.
- McKinsey. “Global M&A Market Defies Gravity in 2021 Second Half”.
- U.S. Securities and Exchange Commission. “P&G Reaffirms Gillette Acquisition Financial Impacts”.
- JetBlue. “JetBlue and Spirit to Create a National Low-Fare Challenger to the Dominant Big Four Airlines”.
- Marriott International. “Marriott International Completes Acquisition of Starwood Hotels & Resorts Worldwide, Creating World’s Largest and Best Hotel Company While Providing Unparalleled Guest Experience”.
- ABInBev. “Annual Report 2016”, Page 2.
- AstraZeneca. “AstraZeneca Strengthens Cardiovascular and Metabolic Disease Portfolio With Acquisition of ZS Pharma”.
- Volkswagen. “2012 Annual Report”, Pages 14 and 16.
- Meta. “Facebook to Acquire Instagram”.
- The Walt Disney Company. “Disney to Acquire Pixar”.
- U.S. Securities and Exchange Commission. “Arcelor Mittal”.
