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Horizontal Integration

Horizontal Integration
Ovidijus Jurevicius | 24.03.2013

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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.

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).
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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.
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
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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.

Horizontal integration examples


Acquiring company

Acquired company

Porsche

Volkswagen

Daimler Benz

Chrysler

Kraft Foods

Cadbury

Quaker Oats

Snapple

PepsiCo

Quaker Oats

Pfizer

Wyeth

Pfizer

Pharmacia Corporation

Glaxo Wellcome

SmithKline Beecham

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AT&T

T-Mobile

AT&T

Bell South

Mittal Steel

Arcelor

HP

Compaq

Oracle

PeopleSoft

Delta

Northwest Airlines

United Airlines

Continental

JPMorgan Chase

Bank One

Microsoft

Taleo

Microsoft

Yahoo!

Apple

AuthenTec

BP

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.
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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.

Sources
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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