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1. Introduction
Horizontal integration happens when one firm acquires another firm operating in the same
industry or producing the same line of products. Companies that engage in horizontal integration
may realize economies of scale, reduced production costs, synergy in marketing, increased
revenue, among others.

As with any other business strategy, horizontal integration does not always lead to increased
value and profitability as expected. Instead, it can be the precursor to dismal performance,
devaluation, inefficiency, stunted economic growth, and reduced competitiveness.

1. Understanding Horizontal Integration

Horizontal integration is a competitive strategy that can result in economies of scale, competitive
edge, increased market share, and business expansion. Businesses in strategic alliances target
outcomes that provide more resources, market, competence, and efficiency. The two
amalgamated entities should be better positioned to realize more revenue than they would have
when operating independently.

Horizontal integration may also involve the optimization of activities or the consolidation of
strategic business activities within the firm’s scope of processes and activities. It may arise from
expansion to new market segments, economies of scale, economies of scope and experience, and
the price difference in the factors of production.

However, these business combinations may create a monopoly power in an industry, which may
be a disadvantage to the consumer. The reduced competition may induce collusive behavior,
leading to increased prices for products.

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 2. Horizontal Strategy
Horizontal integration is a competitive strategy that can create economies of scale, increase
market power over distributors and suppliers, increase product differentiation and help
businesses expand their market or enter new markets.

By merging two businesses, they may be able to produce more revenue than they would have
been able to do independently.

In simpler terms, horizontal integration is the acquisition of a related business: a fast-food

restaurant chain merging with a similar business in another country to gain a foothold in foreign
markets.

Horizontal integration is the process through which firms in the same industry and similar level
of production merge to jointly produce goods and services. This joint operation normally tends to
reduce production and operating costs. As a result, such firms tend to produce their goods and
services at a cheaper price as compared to other individual companies who undertake the whole
process of production on their own.

To stand on a stronger base, firms that decide to adopt this strategy should be experts in their
respective fields. Through horizontal integration, firms are able to exploit the economies of scale
to their advantage. This is because they incur costs jointly. Examples of costs that firms are able
to incur jointly include transpiration, warehousing, advertising, selling and distributions,
purchase of raw materials and labour costs.

Such companies will thus produce their goods and services at a cheaper price as compared to
their rivals. Due to this fact, they will stand a chance of sell their goods at a lower price as
compared to other firms in the market. This will in turn increase their market share.

As a result, such companies will have a competitive advantage in their industries. In addition,
through merging up, companies that have adopted this strategy will enjoy the privileges of
monopoly. The entry of new firms into the market will be difficult due to the high market share
that they hold.

In the motor industry, Volkswagen is a company that has benefited greatly from horizontal
integration. The company merged with Skoda to manufacture vehicles. Their main target group
were the members of the middle and lower classes of the society. Through their expertise, they
were able to manufacture cheap and efficient cars that are desirable for individuals of these
classes.

However, when horizontal mergers succeed, it is often at the expense of consumers, especially if
they reduce competition. 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

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dominant market share, it has a monopoly. This is why horizontal mergers are heavily
scrutinized under antitrust laws.

Facebook and Instagram

One of the most definitive examples of horizontal integration was Facebook's acquisition of
Instagram in 2012 for a reported $1 billion. Both Facebook and Instagram operated in the same
industry (social media) and shared similar production stages in their photo-sharing services.
Facebook sought to strengthen its position in the social sharing space and saw the acquisition of
Instagram as an opportunity to grow its market share, reduce competition, and gain access to new
audiences. Facebook realized all of these through its acquisition. Instagram is now owned by
Facebook but still operates independently as its own social media platform.

In many cases, horizontal integration pays off as those involved can widen their reach and
eliminate weaker competitors. Companies can gain institutional knowledge, expertise, and
strengths that they may lack from another firm. Ultimately, integrating firms reduce their costs
while increasing revenues.

3. Advantages 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 scope, 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 which 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 might merge with a similar business in another country to gain a
foothold there and avoid having to build a distribution network from scratch.

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Reducing Competition: The real motive behind a lot of horizontal mergers is that companies
want to reduce “horizontal” competition in the form of competition from substitutes, competition
from potential new entrants and the competition from established rivals.

4. Disadvantages 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.
And if a merger threatens competitors, it could attract the attention of the Federal Trade
Commission.

There will be a very tough transition change since two companies with unique policies are forced
to work uniformly. Mergers often lead to a lack of competition since there are a reduced number
of companies in the industry. Mergers happen within the best performing companies in an
industry leaving behind a very corporation with considerably weaker companies. With this,
companies can make changes without any hesitation. This is largely disadvantageous to
consumers who have to grapple with increased prices or low-quality goods and services.

There are very many legal constraints that slow down and sometimes block the process of
horizontal integration since the state fears that monopolies of private companies will largely be
exploitative and undermine its power

5. Horizontal Integration in Strategic Management

Horizontal integration, as we have seen, is a company’s acquisition of a similar or a competitive
business—it may acquire, but it may also merge with or takeover, another company to strengthen
itself—to grow in size or capacity, to achieve economies of scale or product uniqueness, to
reduce competition and risks, to increase markets, or to enter new markets.

Quick examples of horizontal expansion are Standard Oil’s acquisition of about 40 other
refineries and the acquisition of Arcelor by Mittal Steel and that of Compaq by HP.

Perfect Conditions for Horizontal Integration

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It’s not every company that can decide to do a merger and succeed since there are certain
situations that favor horizontal integration. Thus, horizontal integration can be a good strategy
when;

 Economies of scale would be suitable

 The company has an edge in resourcefulness over the other companies i.e. adequate
capital and expertise
 The merger would lead to a monopoly that is allowed by the legal system
 The organization exists in a very competitive environment
 The company has enough funds to acquire or merge with their rivals

When is horizontal integration attractive for a business?

A company can think of acquisitions and mergers for horizontal integration in the following
situations:

1. When the industry is growing

2. When rivals lack the expertise that the company has already achieved

3. When economies of scale can be achieved

4. When the company can manage the operations of the bigger organisation efficiently, after the
integration

6. Why Horizontal Integration Is Important

When implemented correctly, horizontal integration can increase the market share and power of
two companies. The companies can merge synergies, product lines, and enter new markets.

Horizontal integration also reduces the level of competition in the market while boosting the
revenue of the participants who otherwise may not have prevailed in a fierce market environment
independently. Through integration, the parties involved can share institutional knowledge while
reducing expenses. Mergers based on horizontal integration are subject to heavy scrutinization
because they can often result in a monopoly where one company dominates the market.

7. Aspects of Horizontal Integration

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There are several aspects that characterize a horizontal integration versus other business
combinations. They include:

1. The direction of horizontal integration

2. Profitability of integration

3. Target of integration

4. Forms and intensity of integration

Horizontal integration can be distinguished from conglomerate integration by taking into account
the direction. It is usually a preserve for companies with financial surpluses. Horizontal mergers
of related companies occur within the same industry or line of products so that the entities
involved can exploit their competencies.

Companies merge and expand their activities as a unit in sectors related to associated products or
services to utilize their skills and resources. Businesses that aim to increase their profitability can
adopt horizontal integration within the same product lines.

On the other end of the spectrum, conglomerate diversification is for companies that strive for
growth. Notwithstanding this rule, some companies may use only the selected competencies of
horizontal integration.

8. Drawbacks of Horizontal Integration

Despite the increased potential profitability of horizontal integration from the increased value
and synergies, the strategy has some potential drawbacks:

1. Threatens competition

Mergers and acquisitions of large corporations usually lead to monopolies to the detriment of
consumers. Market dominance may fuel unethical practices, such as indefinite hiking of market
prices or narrowing of products and services. For this reason, monopolies are subject to antitrust
laws, not to mention the scrutiny of regulatory bodies.

2. Reduces flexibility

Horizontal integration may impede the flexibility of the acquired firm since it must conform to
the operations of the bigger company.

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10. Conclusion
There is increased corporate performance after acquisitions (Healy, Palepu and Ruback, 1992).
The Grand Met Company has proven that there are numerous advantages to be gained when a
company buys similar companies in different locations. Its strategy of reducing costs, improving
the operations and building the brands worked to make it a global leader in the market place.

The company has learnt quite a lot in the whole process over the years. The management has
learnt that the benefits and the advantages of horizontal integration are maximised when the
company chooses one line of operations or stage in the production and concentrates on it. Too
much diversification stretches the financial, technical and staff resources of the company.

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