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Horizontal integration: definition, examples, advantages | SM Insight

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Written on 24 Mar 2013

Horizontal integration: definition, examples, advantages

Contents 1. 2. 3. 4. 5. 6. Definition What is it? Difference between VI and HI Examples Advantages Disadvantages

Definition
1. It is the process of acquiring or merging with competitors, leading to industry consolidation. 2. Horizontal integration is a strategy where a company acquires, mergers or takes over another company in the same industry value chain.

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Jabong.com Shop From Most Trusted e-Store, 30 Days Free Return Policy ! Rs.950.00 What is horizontal integration?
It is a type of integration strategies pursued by a company in order to strengthen its position in the industry. A corporate that implements this type of strategy usually mergers or acquires another company that is in the same production stage. For example, Disney merging with Pixar (movie production), Exxon with Mobile (oil production, refining and distribution) or the infamous Daimler Benz and Chrysler merger (car developing, manufacturing and retailing). The purpose of horizontal integration (HI) is to grow the company in size, increase product differentiation, achieve economies of scale, reduce competition or access new markets. When many firms pursue this strategy in the same industry, it leads to industry consolidation (oligopoly or even monopoly). HI can occur in a form of mergers, acquisitions or hostile takeovers. Merger is the joining of two similar sizes, independent companies to make one joint entity. Acquisition is the purchase of another company. Hostile takeover is the acquisition of the company, which does not want to be acquired. HI may be an effective strategy when: Organization competes in a growing industry. Competitors lack of some capabilities, competencies, skills or resources that the company already possesses. HI would lead to a monopoly that is allowed by a government. Economies of scale would have significant effect. The organization has sufficient resources to manage M&A.

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Horizontal integration: definition, examples, advantages | SM Insight

The following diagram illustrates HI in manufacturing industry:

Difference between horizontal and vertical integrations

HI is different from vertical integration, where a firm usually expands into another production stage rather than merging or acquiring the company in the same production stage. For example, a company is vertically integrating if it expands from manufacturing industry to retailing industry, while HI would mean buying other firms in the same manufacturing industry.

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Horizontal integration examples

Acquiring company Acquired company Porsche Daimler Benz Kraft Foods Quaker Oats PepsiCo Pfizer Pfizer Glaxo Wellcome AT&T AT&T Mittal Steel HP Oracle Delta United Airlines JPMorgan Chase Microsoft Microsoft Volkswagen Chrysler Cadbury Snapple Quaker Oats Wyeth Pharmacia Corporation SmithKline Beecham T-Mobile Bell South Arcelor Compaq PeopleSoft Northwest Airlines Continental Bank One Taleo Yahoo!
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Horizontal integration: definition, examples, advantages | SM Insight

Apple BP

AuthenTec Amoco

Advantages of horizontal integration

Lower costs. The result of HI is one larger company, which produces more services and products. The higher output leads to greater economies of scale and higher efficiency. Increased differentiation. The combined company can offer more product or service features. Increased market power. The larger company has more power over its suppliers and distributors/customers. Reduced competition. The result of industry consolidation is fewer companies operating in the industry and less intense competition. Access to new markets. New markets and distribution channels can be accessed by integrating with a company that produces the same goods but operates in a different region or serves different market segment.

Disadvantages of the strategy

Destroyed value. M&A rarely add value to the companies. More often M&A fail and destroy the value of the companies involved in it because expected synergies never materialize. Legal repercussions. HI can lead to a monopoly, which is highly discouraged by many governments due to lack of competition. Therefore, governments usually have to approve any larger M&A before they can happen. Reduced flexibility. Large organizations are harder to manage and they are less flexible in introducing innovations to the market.

Related topics

Vertical Integration - What is it?

Strategic Management & Strategic Planning

Strategic Management & Strategic Planning Process

Further reading list

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Horizontal integration: definition, examples, advantages | SM Insight

1. Vassoughi, S. at Harvard Business Review (2012). Today's Best Companies are Horizontally Integrated. Available at: http://blogs.hbr.org/cs/2012/12/todays_best_companies_are_hori.html

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Resource Based View

Vision Statement

Mission Statement

Written by Ovidijus Jurevicius

If you're interested in strategic management, business strategy or any other business related topic, connect with me on Google+ Ovidijus Jurevicius

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2 comments Leave a message...

Newest Community Ric k y Davis
7 months ago

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Google has certainly taken full advantage of horizontal integration through the acquisitions of several small to giant online entities. It's also done well to eliminate competitors and as well as strengthen its position in its market. Nowadays business is more about gobbling everything with capital, rather than to build something from ground up. Still, I have to admit horizontal integration can be very profitable.
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Ovidijus Jurevic ius

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Ricky Davis 7 months ago

Horizontal integration is not so much about profitability as for growing market share and eliminating competition. But you're right about saying that big businesses are more keen to use their cash to buy out new entrants rather than to develop products inside the company, because it's cheaper and less risky. One more reason favoring acquisitions of new start ups is that they usually come to the market with innovative products that disrupt the market, including the market leaders, who see horizontal integration as a way out of loosing their market share.
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